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Cato Institute Fiscal Policy Report Card

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Cato Institute Fiscal Policy Report Card Powered By Docstoc
					FISCAL POLICY
REPORT CARD
ON AMERICA’S
GOVERNORS
2012
FISCAL POLICY
REPORT CARD
ON AMERICA’S
 GOVERNORS
     2012
C H R I S E D WA R D S
Copyright © 2012 by the Cato Institute.
All rights reserved.

Cover design by Jon Meyers.

Printed in the United States of America.


Cato InstItute
1000 Massachusetts Ave., N.W.
Washington, D.C. 20001
www.cato.org
                                  Executive Summary

   The recovery from the recent recession has           Tom Corbett of Pennsylvania. Five governors
been very sluggish, and the nation’s gover-             were awarded an “F”—Pat Quinn of Illinois,
nors have struggled with the resulting budget           Dan Malloy of Connecticut, Mark Dayton of
deficits, unemployment, and other economic              Minnesota, Neil Abercrombie of Hawaii, and
problems in their states. Many reform-minded            Chris Gregoire of Washington.
governors elected in 2010 have championed                  Many states are facing major fiscal prob-
tax reforms and spending restraint to get their         lems in coming years. Rising debt and growing
states back on track. Other governors have ex-          health and pension costs threaten tax increases
panded government with old-fashioned tax-               down the road. At the same time, intense global
and-spend policies.                                     economic competition makes it imperative that
   That is the backdrop to this year’s 11th bien-       states improve their investment climates. To that
nial fiscal report card on the governors, which         end, some governors are pursuing broad-based
examines state budget actions since 2010. It            tax reforms, such as cutting income tax rates and
uses statistical data to grade the governors on         reducing property taxes on businesses. The bad
their taxing and spending records—governors             news is that many governors are expanding nar-
who have cut taxes and spending the most re-            row “tax incentives,” which clutter the tax code in
ceive the highest grades, while those who have          an attempt to micromanage the economy.
increased taxes and spending the most receive              This report discusses these trends and exam-
the lowest grades.                                      ines the fiscal policy actions of each governor.
   Four governors were awarded an “A” in this           Hopefully, policymakers in more states will
report card—Sam Brownback of Kansas, Rick               be encouraged to follow the fiscal reform ap-
Scott of Florida, Paul LePage of Maine, and             proaches of the top-scoring governors.




Chris Edwards is director of tax policy studies at the Cato Institute and editor of www.DownsizingGovernment.
org.
               Introduction                         get Officers (NASBO), the National Confer-           This report
                                                    ence of State Legislatures (NCSL), the Tax           grades governors
   Governors play a key role in state fiscal        Foundation, the budget agencies of each
policy. They propose budgets, recommend             state, and news articles in State Tax Notes and      on their fiscal
tax changes, and sign or veto tax and spend-        other sources. The data cover the period Jan-        policies from
ing bills. When the economy is growing,             uary 2010 to August 2012, which was a time
governors can use rising revenues to expand         of modest budget expansion in most states.1
                                                                                                         a limited-
programs, or they can return extra revenues         The report covers 48 governors. It excludes          government
to citizens through tax cuts. When the econ-        Mississippi’s governor because of his short          perspective.
omy is stagnant, governors can raise taxes to       time in office, and it excludes Alaska’s gov-
close budget gaps, or they can cut spending.        ernor because of peculiarities in that state’s
   This report grades governors on their fis-       budget.
cal policies from a limited-government per-             The following section reviews the records
spective. The governors receiving an “A” are        of the highest-scoring and lowest-scoring
those who cut taxes and spending the most,          governors, and it discusses some of the pol-
while the governors receiving an “F” raised         icy trends that emerged from the analysis.
taxes and spending the most. The grading            After that, the longer-term outlook for state
mechanism is based on seven variables, in-          budgets is discussed, focusing on the crisis in
cluding two spending variables, one revenue         state debt and unfunded obligations. Appen-
variable, and four tax rate variables. The          dix A discusses the report card methodology.
same methodology was used on Cato’s 2008            Appendix B provides brief summaries of the
and 2010 report cards.                              fiscal records of the 48 included governors.
   The results are data-driven. They account
for tax and spending actions that affect
short-term budgets in the states. But they                  Main Results and
do not account for longer-term or structural                 Policy Trends
changes that governors may make, such as
reforms to state pension plans. Thus, the              Table 1 presents the overall grades for the
results provide one independent measure of          governors. Scores ranging from 0 to 100 were
how “fiscally conservative” each governor is,       calculated for each governor based on seven
but they don’t reflect all the fiscal actions       tax and spending variables. Scores closer to
that governors may make.                            100 indicate governors who favored smaller-
   Tax and spending data for the report came        government policies. The numerical scores
from the National Association of State Bud-         were converted to the letter grades “A” to “F.”

Table 1
Overall Grades for the Governors
State                          Governor                     Score                   Grade
Kansas                   Sam Brownback (R)                    69                       A
Florida                  Rick Scott (R)                       69                       A
Maine                    Paul LePage (R)                      65                       A
Pennsylvania             Tom Corbett (R)                      65                       A
Louisiana                Bobby Jindal (R)                     62                       B
New Hampshire            John Lynch (D)                       62                       B
North Dakota             Jack Dalrymple (R)                   62                       B
Alabama                  Robert Bentley (R)                   61                       B
                                                                                   Continued next page



                                                3
State                  Governor               Score   Grade
Idaho            C.L. “Butch” Otter (R)        58      B
Wyoming          Matt Mead (R)                 58      B
Ohio             John Kasich (R)               58      B
New Jersey       Chris Christie (R)            58      B
Michigan         Rick Snyder (R)               57      B
Nebraska         Dave Heineman (R)             57      B
Wisconsin        Scott Walker (R)              57      B
Nevada           Brian Sandoval (R)            57      B
Iowa             Terry Branstad (R)            55      B
South Carolina   Nikki Haley (R)               55      B
Oklahoma         Mary Fallin (R)               55      B
Massachusetts    Deval Patrick (D)             55      B
Indiana          Mitch Daniels (R)             55      B
New Mexico       Susana Martinez (R)           54      C
Missouri         Jay Nixon (D)                 53      C
Georgia          Nathan Deal (R)               53      C
South Dakota     Dennis Daugaard (R)           53      C
Colorado         John Hickenlooper (D)         53      C
Arkansas         Mike Beebe (D)                52      C
Montana          Brian Schweitzer (D)          51      C
Texas            Rick Perry (R)                51      C
North Carolina   Beverly Perdue (D)            51      C
West Virginia    Ray Tomblin (D)               50      C
Virginia         Bob McDonnell (R)             50      C
California       Jerry Brown (D)               49      D
Delaware         Jack Markell (D)              48      D
Arizona          Jan Brewer (R)                48      D
Kentucky         Steven Beshear (D)            47      D
Utah             Gary Herbert (R)              47      D
Oregon           John Kitzhaber (D)            45      D
New York         Andrew Cuomo (D)              45      D
Tennessee        Bill Haslam (R)               43      D
Maryland         Martin O’Malley (D)           42      D
Rhode Island     Lincoln Chafee (I)            41      D
Vermont          Peter Shumlin (D)             40      D
Washington       Chris Gregoire (D)            38       F
Hawaii           Neil Abercrombie (D)          32       F
Minnesota        Mark Dayton (D)               21       F
Connecticut      Dan Malloy (D)                17       F
Illinois         Pat Quinn (D)                 16       F



                                          4
Highest-Scoring Governors                               are sufficient budget surpluses. The
   The highest-scoring governors are those              governor says that his ultimate goal
who have supported the largest tax and                  is to phase out the individual income
spending cuts. Here are the four governors              tax completely, and he wants to cut the
who received grades of “A”:                             corporate tax rate from 8 to 4 percent.
                                                        LePage has also focused on spending
  ● Sam Brownback of Kansas signed into                 cuts. He signed into law reforms to re-
    law one of the most impressive tax                  duce the costs of welfare, health care,
    reforms of any state in recent years.               and pensions, and he wants to end
    Brownback called for a “fairer, flatter,            funding for Maine Public Broadcast-
    and simpler” income tax system and                  ing, calling it “corporate welfare.”
    he proposed a detailed reform plan. In            ● Tom Corbett of Pennsylvania has been
    May, the legislature delivered a plan to            a frugal budgeter. The state is expected
    his desk and he signed it into law. The             to spend less next year than it did when
    reform simplified the personal income               he came into office. Corbett is also
    tax structure from three tax rates to               pursing the phase out of the Capital
    two and cut the top rate from 6.45 to               Stock and Franchise Tax, which is paid
    4.9 percent. It also increased the stan-            by 100,000 Pennsylvania businesses.
    dard deduction, reduced the taxation                So far Corbett has sliced the tax from
    of small business income, and repealed              $819 million a year to $479 million,
    numerous special-interest tax breaks.               and he plans to fully repeal it by 2014.
    The cuts are expected to save Kansas                Corbett argues: “This tax is a job-killer.
    taxpayers about $800 million a year.                . . . We don’t need it. We don’t benefit
  ● Rick Scott of Florida has championed                from it, and we must get rid of it.’’2
    major tax and spending reforms. He
    has proposed substantial budget cuts,           Lowest-Scoring Governors
    vetoed hundreds of millions of dollars             The lowest-scoring governors are those
    of wasteful spending, and trimmed               who have increased taxes and spending the
    state employment. Scott is also deter-          most. These governors seem to view the gov-
    mined to give Florida the best econom-          ernment’s financial priorities as more impor-
    ic climate for business investment and          tant than the financial priorities of average
    job creation in the country. He wants           tax-paying citizens. Here are the six gover-
    to phase out the corporate income tax           nors who received a grade of “F”:
    (CIT), and he has made progress to-
    ward that goal by raising the CIT ex-             ● Pat Quinn of Illinois took office after
    emption to end the tax for thousands                his predecessor, Rod Blagojevich, was
    of small businesses. Scott’s plan to cut            impeached and removed. Unfortu-
    taxes on business personal property is              nately, Quinn is following the same
    on the November ballot. If citizens ap-             approach that earned Blagojevich an          Sam Brownback
    prove the plan, it would end this tax for           “F” grade from Cato in 2008.3 In 2009
    about 156,000 businesses.                           Quinn signed into law a $1.1 billion tax     of Kansas signed
  ● Paul LePage of Maine signed into law                increase. In 2011 he pushed through a        into law one
    a major income tax cut. The reform                  massive $7 billion tax increase, which       of the most
    reduced the top individual tax rate                 included higher individual income
    from 8.5 to 7.95 percent, simplified tax            taxes, corporate taxes, and estate taxes.    impressive tax
    brackets, and reduced taxes on busi-                Quinn raised the top individual in-          reforms of any
    ness investment. LePage then signed                 come tax rate from 3 to 5 percent, and
    legislation to reduce the top individual            raised the top corporate rate from 4.8
                                                                                                     state in recent
    tax rate to 4 percent over time if there            to 7.0 percent. Illinois corporations pay    years.


                                                5
    In this year’s     a special tax on top of the basic rate to           higher taxes on pension income, soda,
results, there are     bring the overall rate to 9.5 percent. In           and alcohol.
                       2012 Quinn approved a large cigarette             ● Chris Gregoire of Washington earned
 fewer governors       tax increase. Quinn also spends too                 a well-deserved “F” on the last Cato
    than in prior      much, and he has tried to paper over                report card. There has been a never-
                       the state’s fiscal problems by issuing              ending stream of tax-increase propos-
     reports who       billions of dollars of bonds to cover               als coming from this governor since
   are out of step     unpaid state bills and to fund the state            2005. In her first year, she raised taxes
  with the typical     pension plan.                                       on cigarettes, gasoline, liquor, and ve-
                     ● Dan Malloy of Connecticut signed into               hicles. She also re-established an estate
 policies of their     law a huge $1.8 billion tax increase,               tax after a previous version had been
          parties.     which increased the top individual in-              struck down by the courts. In 2009 she
                       come tax rate from 6.5 to 6.7 percent,              signed into law increases in business
                       the top corporate tax rate from 8.25 to             taxes, sales taxes, cigarette taxes, beer
                       9.0 percent, and the sales tax rate from            taxes, soda taxes, and candy taxes. In
                       6.0 to 6.35 percent. The governor also              2010 she approved a large increase in
                       increased hotel taxes, luxury goods                 the cigarette tax, a huge hospital tax,
                       taxes, online sales taxes, alcohol taxes,           and increases in business taxes and
                       and the state death tax. After this tax-            beer taxes. In 2011 she proposed a half
                       hike orgy, Malloy had the gumption                  cent increase in the sales tax rate, but
                       to claim that some small tax credits                that was rejected by the legislature. In
                       he approved were a “far reaching” and               2012 Gregoire proposed a new tax on
                       “rigorous initiative to grow jobs.”4                crude oil to raise $275 million a year.
                     ● Mark Dayton of Minnesota soon re-
                       vealed his taste for bigger government          Are Republicans and Democrats Any
                       after he entered office in 2011. Gen-           Different?
                       eral fund spending jumped almost                    Advocates of smaller government often
                       10 percent in his first year in office.5        lament that politicians of both major par-
                       To fund the spending, he proposed a             ties tax and spend too much. While that is
                       large tax increase to raise $2 billion a        certainly true, Cato report cards have found
                       year. The plan would have raised the            that Republican governors are a bit more
                       top personal income tax rate from 7.85          fiscally conservative than Democratic gover-
                       to 10.95 percent, with an additional 3          nors, on average. In the 2008 report card, Re-
                       percentage point tax on top of that for         publican and Democratic governors had av-
                       the highest earners. Dayton also want-          erage scores of 55 and 46, respectively. In the
                       ed business tax increases and a new             2010 report card, they had average scores of
                       property tax on higher-valued homes.            55 and 47, respectively.
                       The legislature rejected Dayton’s tax-              This pattern is even more pronounced
                       increase plans.                                 in the 2012 report card. This time around,
                     ● Neil Abercrombie of Hawaii has focused          Republican and Democratic governors had
                       on increasing both taxes and spending           average scores of 57 and 43, respectively.
                       as governor of the Aloha State since            And, as in prior report cards, the difference
                       2011. General fund spending jumped              between the two parties is slightly more pro-
                       about 12 percent during his first year          nounced on taxes than on spending.
                       in office.6 To fund the spending, the               The fiscal differences between governors
                       governor has supported a slew of tax            of the two parties have increased a bit. In this
                       increases. He signed into law higher            year’s results, there are fewer governors than
                       income taxes, excise taxes, and taxes           in prior reports who are out of step with
                       on rental cars. He has also proposed            the typical policies of their parties. In both



                                                                   6
the 2008 and 2010 reports, for example,                 yet they deter economic growth and impose
Democrat Joe Manchin earned an “A,” while               high compliance burdens.10
Republican Jodi Rell earned an “F.” But in                  Another recent trend is the reduction of
this year’s report, all four “A” governors are          retail sales taxes on business inputs. In theo-
Republicans and all five “F” governors are              ry, retail sales taxes should be imposed only
Democrats.                                              on final consumption. But many states im-
                                                        pose sales taxes on capital and intermediate
Business Tax Reforms                                    products used by businesses, which raises
    With the struggling economy of recent               the costs of production. Ernst and Young
years, a growing number of governors are                analysts found that a remarkable 43 percent
trying to make their states more attractive             of all sales taxes fall on business purchases
for business investment. Governors are pur-             of capital and intermediate inputs.11 This is
suing cuts to corporate income taxes, sales             an important tax burden that deters invest-
taxes on business inputs, and property taxes            ment, but it hidden from the view of most
on machinery and equipment.                             citizens.
    Corporate income tax rates have plunged                 Georgia Governor Nathan Deal notes cor-
around the world over the last two decades.             rectly that “because the sales tax is intended
The average rate in major industrial coun-              to be a tax on consumption, it should not be
                                                                                                          With the
tries has fallen from more than 40 percent              applied to business inputs.”12 Deal signed        struggling
in the 1980s to just 25 percent today.7 But             legislation to end sales taxes on energy used     economy of
until recently, most governors were asleep at           in manufacturing. Florida’s Rick Scott and
the switch regarding this growing competi-              other governors are also pursuing reforms         recent years, a
tive threat. The average state corporate tax            to reduce sales taxes on business inputs.         growing number
rate is actually a bit higher now than it was               High property taxes are another deter-
in the 1980s.8 Some states have increased               rent to business investment. Tax rates on
                                                                                                          of governors
their business tax burdens in recent years.             commercial and industrial real property           are trying to
Governor Rick Perry, for example, signed                (land and buildings) are often higher than        make their states
into law the costly Texas Margin Tax in                 the rates on residential property. One study
2006, while Governor Pat Quinn increased                found that effective property tax rates on        more attractive
the Illinois corporate income tax rate in               real commercial property are 72 percent           for business
2011.                                                   higher, on average, than on residential prop-     investment.
    However, many governors are now re-                 erty for a large sample of U.S. cities.13 There
sponding to the challenge of national and               seems to be no good economic reason for
international tax competition. Indiana’s                this disparity. Instead, imposing higher rates
Mitch Daniels signed into law a 2 percent-              on business-owned property seems to be just
age point corporate tax rate cut, Arizona’s             a politically convenient way of raising taxes
Jan Brewer signed a 2.1 percentage point cut,           in a manner invisible to most voters.
and North Dakota’s Jack Dalrymple signed a                  In addition to taxes on real property, gov-
1.25 percentage point cut. Other governors              ernments in most states impose property
who have proposed corporate tax rate cuts               taxes on some types of business personal
include Rick Scott of Florida, Terri Bradstad           property, which includes assets such as ma-
of Iowa, Paul LePage of Maine, and Nikki                chinery, equipment, computers, furniture,
Haley of South Carolina. Governor Haley                 vehicles, and inventories.14 There is no eco-
says that the corporate tax “generates a rela-          nomic rationale for these taxes. Indeed, they
tively small portion of the state’s overall re-         punish investments in the very machines
ceipts” and repealing it “would send a strong           that help to create the nation’s gross domes-
signal that we want to attract jobs and busi-           tic product. Unlike land, which is immobile,
nesses.”9 She’s right. State corporate income           business personal property is mobile across
taxes raise just 5 percent of state tax revenues,       state lines. Thus when a state or county



                                                    7
                       imposes higher taxes on business personal           wa’s Terry Branstad, who is pushing hard to
                       property, investment will gravitate toward          reduce taxes on industrial and commercial
                       other jurisdictions.                                property, and Pennsylvania’s Tom Corbett,
                          Some governors are taking action. Colo-          who is leading the drive to repeal that state’s
                       rado’s John Hickenlooper has signed legisla-        Capital Stock and Franchise Tax.
                       tion reducing that state’s “much-hated” busi-          A study by the Council on State Taxation
                       ness personal property tax, as one reporter         and Ernst and Young tallied the total cost of
                       called it.15 A Colorado news story explained:       state and local taxes on businesses.19 In 2011
                       “Business leaders have long complained that         property taxes cost businesses $245 billion,
                       the personal property tax, which assesses a         sales taxes on business inputs cost $130 bil-
                       perpetual fee on every piece of equipment           lion, and state corporate income taxes cost
                       used by a business, is one of the most oner-        $46 billion. A slew of other state and local
                       ous in the state, as it requires payment even       taxes cost businesses a further $223 billion.
                       in years in which the business does not make        All in all, state and local taxes on businesses
                       a profit and discourages companies from ex-         cost a huge $644 billion, which is more than
                       panding or purchasing new equipment.”16             double the cost of federal corporate income
                          Governor Rick Snyder of Michigan is also         taxes.
                       pushing for reductions to business personal            The focus on business tax reduction by a
                       property taxes, which raise about $1 billion        growing number of governors is long over-
                       a year in that state. A study by Anderson           due. Policymakers who want to reinvigorate
                       Economic Group found that these taxes are           America’s manufacturing and industrial sec-
                       particularly harmful to the highly capital-         tors should look at reforming the many state
                       intensive industrial sector in Michigan.17          and local taxes that impede business invest-
                       In addition to the direct damage, Anderson          ment.
                       found that the complexity of these taxes cre-
                       ates large compliance costs for businesses.         Tax Incentive Disease
                          Snyder is proposing to exempt business              While some governors are pursuing
                       personal property valued at under $40,000,          broad-based tax reforms, others are trying to
                       which would remove from the rolls about             micromanage their states’ economies with
                       60 percent of businesses that currently pay         “tax incentives.” These narrow, special-inter-
                       the tax.18 At the same time, he is propos-          est tax breaks have spread like a contagious
                       ing to phase out many special interest tax          disease over the last decade or so. Most states
                       breaks. These proposals come on the heals           now offer dozens of tax incentives targeting
                       of Snyder’s landmark reform last year that          favored types of businesses and activities.
                       scrapped the Michigan Business Tax and re-          In Missouri, for example, the value of state
                       placed it with a less costly corporate income       tax credits quadrupled between 1999 and
                       tax. This reform will save Michigan busi-           2009, with the state now providing 64 dif-
         State and     nesses about $1.6 billion a year.                   ferent credits.20 Wisconsin has 170 official
     local taxes on       In Florida the legislature approved Gov-         “tax exemption devices” under its income
                       ernor Scott’s proposal to increase the exemp-       tax, including credits, exclusions, and other
 businesses cost a     tion amount for taxes on business personal          sorts of breaks.21 Wisconsin has tax breaks
huge $644 billion,     property, which would end the tax for about         for technology zones, dairy and livestock in-
    which is more      half of the more than 300,000 businesses            vestment, ethanol, meat processing, Internet
                       that currently pay it. The measure will be on       equipment, job creation, and many other
  than double the      the ballot this November for voters to de-          things.
    cost of federal    cide. Scott has also proposed reducing sales           The growth in state tax incentives is bad
                       taxes on business purchases of machinery            policy for many reasons. For one thing, tax
corporate income       and equipment.                                      incentives create unequal treatment between
              taxes.      Other business tax reformers include Io-         different companies and industries, which is



                                                                       8
unfair and distorts the economy. In Michi-             jobs credits, governments are essentially         The proliferation
gan, for example, Boar’s Head meat compa-              stepping inside company boardrooms and            of tax incentives
ny received a government grant and an “eco-            deliberately distorting workforce decisions.
nomic development” tax credit for one of its           Such tax credits are criticized because some      also increases
facilities, which prompted the president of            studies have found them to be ineffective         the likelihood
Michigan’s Koegel Meats to complain that               at increasing hiring.26 But even if they were
the government was unfairly subsidizing his            “effective,” they wouldn’t be a good idea be-
                                                                                                         of fraud by
competitor.22                                          cause by distorting business decisions they       businesses and
    Tax incentives favor companies and in-             misallocate resources and reduce overall eco-     corruption by
dustries that have good lobbyists or that              nomic output.
politicians find sexy and appealing. Film                 Tax incentives also generate costly bu-        public officials.
production tax breaks are the poster child             reaucracies. Many state governments have
for tax incentive disease. These breaks were           set up whole agencies to hand out tax and
first enacted in the 1990s and are now pro-            spending benefits to businesses, such as
vided by more than 40 states.23 In 15 states,          film offices to hand out film tax credits and
these credits are “refundable,” meaning that           economic development offices to hand out
businesses receive a cash benefit whether              jobs credits. Every incentive creates compli-
or not they actually paid any taxes.24 When            ance burdens because businesses need to ap-
governors bestow special benefits on film              ply for the breaks, report on how they used
production, it affords them the chance to              them, and deal with all the accounting and
have press conferences with famous Holly-              legal paperwork. Have companies created all
wood stars. But such credits inefficiently tilt        the jobs that they promised when they took
investment toward the film industry—which              the jobs credits? States need bureaucrats to
often features temporary jobs and fly-by-              audit the companies and figure that out.
night companies—and away from more                        The proliferation of tax incentives also in-
durable but unsexy industries that have to             creases the likelihood of fraud by businesses
pay the full burden of state taxation. Why             and corruption by public officials. Iowa re-
should film production get a tax advantage             cently suffered a far-reaching scandal involv-
over, say, furniture manufacturing?                    ing its film tax credit program. Prosecutors
    In recent years, there has been an explosion       have convicted seven people for offenses re-
in “jobs” tax credits, which provide breaks to         lated to the illegal pocketing of millions of
companies that hire workers based on con-              dollars in credits. Those convicted include
ditions set by the government. Arizona’s Jan           both filmmakers and the former head of the
Brewer signed into law a “quality jobs” pro-           state film office who “got caught up in the
gram that provides companies a $3,000 per              allure of making Iowa ‘the Hollywood of the
job tax credit if they meet certain criteria,          Midwest.’”27 Investigations found that 80
such as providing health insurance, investing          percent of the value of the state’s film tax
a certain amount, and paying certain levels            credits had been taken improperly.28
of wages depending on the particular county               Unfortunately, most governors support
in the state.25 Idaho’s Butch Otter approved           tax incentives. Republican governors often
a business tax credit worth 6 percent of wag-          claim allegiance to free markets, but their
es for each new hire. The jobs must include            support of tax incentives amounts to sup-
health benefits and pay at least $15 per hour,         port of central planning. As for Democrats,
except in counties with high unemployment              they often support broad-based tax increas-
where they must pay at least $12 per hour.             es that harm businesses, but then they also
    Jobs tax credits make no economic sense.           offer narrow breaks to favored businesses
There is no evidence that American busi-               and claim that they are creating jobs.
nesses are not hiring the correct number of               Consider Pat Quinn of Illinois. He signed
workers to serve their customers. Yet with             a $1.1 billion tax increase in 2009 and then



                                                   9
                   a massive $7 billion tax increase in 2011,               cause “the cost of the tax is promised back
                   which included a big hike in corporate in-               to providers through an increase in the
                   come taxes. But then Quinn apparently                    Medicaid reimbursement rate for their pa-
                   noticed that high taxes were pushing busi-               tient treatment and services.”33 In the last
                   nesses out of Illinois, so he has dished out a           couple of years, Indiana, Oklahoma, Mary-
                   series of special breaks to particular compa-            land, North Carolina, and a number of other
                   nies that threaten to leave, including Sears,            states have expanded these taxes.
                   Motorola, and the companies that operate                    In Tennessee, Governor Bill Haslam in-
                   Chicago’s financial exchanges, CME Group                 creased and extended that state’s hospital
                   and CBOT Holdings.29 Quinn has also                      tax. A news story summarized the purpose
                   handed out fiscal goodies to the film and                of the bill: “A ‘temporary’ 3.52 percent hos-
                   TV industries.30                                         pital gross-receipts tax enacted last year will
                      Dan Malloy of Connecticut increased                   be extended and raised to 4.52 percent, gen-
                   individual income taxes, corporate income                erating $450 million that will draw down an
                   taxes, sales taxes, and other taxes in a huge            additional $871 million in federal Medicaid
                   tax bill in 2011. Then, after hitting the state          money for TennCare.”34
                   economy with that tax sledgehammer, Mal-                    In New Hampshire, a battle over the hos-
    The spread     loy signed into law a jobs tax credit for small          pital tax last year prompted one reporter to
    of state tax   businesses. This credit, he claimed, represents          describe the “accounting sleight of hand”
     incentives    a “rigorous initiative to grow jobs . . . and the        whereby “hospitals wire the state millions of
                   result is a state that is finally ready and able         dollars to pay the ‘Medicaid Enhancement
   represents a    to compete in the global marketplace.”31                 Tax,’ and the state then wires the amount
troubling move        In sum, the spread of state tax incentives            back, often within minutes. The goal of the
                   represents a troubling move away from free               tax [is] to create the illusion of raising mon-
 away from free    markets and toward crony capitalism, simi-               ey so the state [can] apply for and receive
   markets and     lar to what we have seen at the federal level            more federal matching funds.”35
  toward crony     in recent years. But policymakers at all levels             In Oregon, Governor John Kitzhaber
                   of government need to understand that we                 signed a bill last year increasing hospital
    capitalism.    will achieve the strongest economic growth               taxes. A state official explained:
                   if we have low and neutral taxation that
                   treats all industries equally.                              The state raised $315 million with the
                                                                               hospital tax over the last two years
                   Health Care Provider Taxes                                  and could raise twice that much in
                      Like tax incentives, taxes on health care                2011–13 by increasing the tax, said
                   providers are a bad tax policy idea that has                Dr. Bruce Goldberg, director of the
                   nonetheless spread across the country with                  Oregon Health Authority. Each state
                   bipartisan support. Forty-six states have                   dollar flowing to Medicaid is matched
                   implemented taxes on hospitals, nursing                     by about $1.60 by the federal govern-
                   homes, and other health providers to fund                   ment, Goldberg said. Hospitals would
                   their Medicaid programs.32 The purpose of                   pay more taxes, but they also would
                   these taxes is not to raise money from the                  get back more in Medicaid payments
                   health care industry, but for the states to grab            and would come out ahead.36
                   more “matching funds” from Washington.
                      State governments impose taxes on health                 An Oregon legislator added: “When peo-
                   care providers, and then they increase spend-            ple look at the hospital provider tax, they
                   ing on health care to pay back the providers.            sometimes miss the key point . . . This is not
                   The extra spending draws more matching                   a tax. It doesn’t cost them a penny. We’re
                   funds from the federal government. Health                making them completely harmless. For ev-
                   care providers often support these taxes be-             ery dollar the hospitals get assessed, they get



                                                                       10
    it right back. We just use the hospital tax to                   strain health care spending, rather than try-       Unlike general
    get the federal match.”37                                        ing to pass the buck for overspending onto          fund spending,
        But that is the Santa Claus theory of gov-                   federal taxpayers.
    ernment. Of course these policies raise taxes—                                                                       total state
    they raise federal taxes. All those “federal                                                                         spending never
    dollars” showered on state health programs                            Fiscal Policy Outlook                          fell. It rose
    ultimately have to come from taxpayers who
    live in the 50 states. There is no free lunch                       Figure 1 shows state general fund spend-         5.3 percent in
    when the states spend federal money, but the                     ing since 2000. Spending rose 47 percent            2009, 4.0 percent
    current federal-state structure of Medicaid                      between 2000 and 2008, and then it fell for
    makes state policymakers act as if there is.                     two years as the states trimmed their bud-          in 2010, and
    Finally, note that the NCSL considers these                      gets. But spending has bounced back since           4.1 percent in
    health care provider charges to be taxes in its                  2011, according to NASBO.41                         2011.
    an annual review of state tax changes.38                            NASBO also produces data on total state
        Federal grant programs that include                          spending, which includes spending financed
    matching create a powerful pro-spending                          from general fund revenues, federal aid, and
    bias in state fiscal policy.39 They encourage                    other sources. Unlike general fund spend-
    states to expand their programs beyond rea-                      ing, total state spending never fell. It rose 5.3
    sonable levels, while giving them less incen-                    percent in 2009, 4.0 percent in 2010, and 4.1
    tive to reduce fraud and inefficiencies. Thus                    percent in 2011.42 During those years, infu-
    the first step toward cutting Medicaid’s ris-                    sions of federal “stimulus” dollars allowed
    ing costs should be to get rid of matching                       the states to keep on spending.
    and convert the program to a block grant.40                         We can broaden the budget picture even
    Health care provider taxes would be elimi-                       further by looking at total spending by both
    nated and the states would receive a fixed                       state and local governments. Figure 2 shows
    handout from the federal government. That                        that state and local spending rose 62 percent
    would give the states a strong incentive to re-                  between 2000 and 2010 and then flattened

   Figure 1
   State General Fund Spending


                                                                               687                              683
                      700                                                                                668
                                                                         655          661
                                                                                                   647
                                                                                            623
                                                                599
                      600
Billions of Dollars




                                                          554
                                                    523
                                  506         508
                                        488
                      500
                            468


                      400



                      300
                            2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

   Source: National Association of State Budget Officers (NASBO), “Fiscal Survey of the States,” Spring 2012.
   Notes: These are fiscal years. Data for 2012 and 2013 are NASBO estimates.


                                                                11
   Figure 2
   Total State and Local Government Spending
                       2.5

                                                                                                        2.28    2.29   2.29
                                                                                                2.24
                                                                                        2.19
                                                                                 2.08

                       2.0                                                1.93
Trillions of Dollars
                                                                  1.85
                                                           1.76
                                                    1.68
                                            1.61
                                    1.53
                       1.5
                             1.41




                       1.0
                             2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


   Source: U.S. Bureau of Economic Analysis, National Income and Product Accounts, Table 3.3.
   Note: These are calendar years. Data for 2012 is estimated based on two quarters.




   Figure 3
   State and Local Government Bond Debt Outstanding


                       3.5

                                                                    New data series


                       2.5
Trillions of Dollars




                                                                                        Old data series

                       1.5




                       0.5
                             2000    2001    2002     2003   2004    2005    2006     2007     2008    2009    2010    2011

    Source: Federal Reserve Board, “Flow of Funds Accounts of the United States,” June 7, 2012, Table D.3.



                                                                     12
out after that.43 Total state and local govern-         ing more realistic assumptions, Robert Novy-
ment spending never fell. Thus while many               Marx and Joshua Rauh found that state and
states trimmed their general fund budgets               local government pensions have a funding
during the recession, the overall state and             gap of about $3 trillion.49 Even that higher
local fiscal situation has not been as dire as          number doesn’t reflect the full problem be-
many news reports have suggested.                       cause it only includes the costs of benefits
    An even broader look at the state and local         that have already accrued. Cato’s pension ex-
fiscal situation would include the rise in gov-         pert, Jagadeesh Gokhale, estimated that the
ernment debt. Figure 3 shows that bond debt             funding gap for accrued benefits plus future
outstanding expanded rapidly over the past              accruals is about $10 trillion.50 On top of
decade. Until recently, Federal Reserve data            that, state and local retirement health plans
on state and local debt showed an increase              have huge funding gaps as well.51
from $1.2 trillion in 2000 to $2.5 trillion in             What all this means is that policymakers
2010. This is the bottom line in the chart.             in many states have created a big fiscal mess
But the Federal Reserve recently switched to            that may spawn large tax increases down the
a new data series that added about $600 bil-            road. This report card focuses on short-term
lion to the total.44 The new data show that             taxing and spending, but a fuller assess-
state and local bond debt is now $3 trillion,           ment would also include how the actions of
which works out to more than $25,000 for                each governor affected the long-term fiscal
every household in the nation.                          health of his or her state. The good news is
    Now let’s consider state-level debt only.           that some governors—such as Wisconsin’s
Moody’s Investors Service collects data on              Scott Walker—are taking steps to reduce
“tax-supported debt,” which is debt that will           the long-term costs of government. And,
have to be paid back by state taxpayers.45              indeed, numerous states have taken mod-
State tax-supported debt more than doubled              est steps to reform their pension plans, but
from $230 billion in 2000 to $510 billion in            much more needs to be done to reduce debt
2011. If all this debt was used for productive          and unfunded obligations.
capital investments, it might not be a big
problem. However, some governments are
becoming more irresponsible with their debt                    Appendix A:
issuance. Pat Quinn of Illinois, for example,            Report Card Methodology
is proposing to issue $7 billion in bonds to
pay for past-due operating bills that the state            This study computes a fiscal policy grade
has failed to pay.46 And in recent years, Illi-         for each governor based on his or her suc-
nois has issued billions of dollars in bonds            cess at restraining taxes and spending since
to cover its contribution to the state’s pen-           2010, or since 2011 for governors entering
sion plan. The truth about bond issuance is             office that year. The spending data used in
that it is just a nontransparent way of raising         the study come from the National Associa-
taxes. So efforts such as Quinn’s to expand             tion of State Budget Officers (NASBO) and       State and local
the use of bonds is a serious fiscal threat that        budget documents of the individual states.
citizens should be very concerned about.47              The data on proposed and enacted tax cuts       bond debt is
    Alongside the rise in bond debt is the rise         comes from NASBO, the National Con-             now $3 trillion,
in unfunded pension obligations of govern-              ference of State Legislatures (NCSL), and       which works out
ments. Official estimates show that state and           hundreds of news articles in State Tax Notes
local pension plans are underfunded (or over-           and other news sources.52 The tax rate data     to more than
promised) by about $1 trillion.48 However, of-          comes from the Tax Foundation, but is up-       $25,000 for every
ficial estimates understate the poor shape of           dated by the author for any recent changes.53
pension plans because they rely on optimistic              This year’s report card uses the same
                                                                                                        household in the
assumptions in valuing future liabilities. Us-          methodology as the 2008 and 2010 Cato re-       nation.


                                                   13
                            port cards. The report focuses on short-term            Tax Rate Variables
                            taxing and spending actions to judge wheth-               4. Change in the top personal income tax
                            er the governors take a small-government                     rate approved by the governor.
                            approach or big-government approach to                    5. Change in the top corporate income
                            policy. Each governor’s performance is mea-                  tax rate approved by the governor.
                            sured using seven variables: two for spend-               6. Change in the general sales tax rate ap-
                            ing, one for revenue, and four for tax rates.                proved by the governor.
                            The overall score is calculated as the average            7. Change in the cigarette tax rate ap-
                            score of these three categories. Tables A1 and               proved by the governor.
                            A2 summarize the governors’ scores.
                                                                                       The two spending variables are measured
                            Spending Variables                                      on a per capita basis to adjust for the fact
                              1. Average annual percentage change in                that state populations are growing at dif-
                                 per capita general fund spending pro-              ferent rates. Also, the spending variables are
                                 posed by the governor.                             only for state general fund budgets, which
                              2. Average annual percentage change in                are usually the budgets that governors have
                                 actual per capita general fund spending.           the most control over. Variable 1 is mea-
                                                                                    sured through fiscal 2013, and variable 2 is
                            Revenue Variable                                        measured through fiscal 2012. Variables 3
                              3. Average dollar value of proposed, enact-           to 7 cover changes during the period Janu-
                                 ed, and vetoed tax changes. This variable          ary 2010 to August 2012, or January 2011 to
                                 is measured by the reported estimates of           August 2012 for governors entering office in
                                 the annual dollar effects of tax changes           2011.
                                 as a percentage of a state’s total tax rev-           For each variable, the results are standard-
                                 enues. This is an important variable, but          ized, with the worst scores near 0 and the
                                 is a challenge to measure as it is com-            best scores near 100. The score for each of
                                 piled from hundreds of news articles,              the three categories—spending, revenue, and
                                 budget documents, and reports.54                   tax rates—is the average score of the variables

Table A.1
Spending and Revenue Variables
                                                                                                         Changes in Revenues
                                                   Proposed Changes Actual Changes                        from Proposed and
                                        Spending     in Per Capita   in Per Capita               Revenue Enacted Tax Changes
State                Governor             Score      Spending (%)    Spending (%)                 Score          (%)
Alabama        Robert Bentley (R)          80              -4.8                     1.5             53               0.1
Arizona        Jan Brewer (R)              42               4.3                     3.1             51               0.3
Arkansas       Mike Beebe (D)              50               2.9                     2.2             55               -0.1
California     Jerry Brown (D)             88              -1.6                     -6.4             6               4.7
Colorado       John Hickenlooper (D)       50               3.1                     1.9             58               -0.5
Connecticut    Dan Malloy (D)              32               6.2                     4.0              0                7.4
Delaware       Jack Markell (D)            34               3.5                     8.1             59               -0.6
Florida        Rick Scott (R)              87              -6.6                     -1.5            69               -1.5
Georgia        Nathan Deal (R)             53               2.8                     1.1             56               -0.2
Hawaii         Neil Abercrombie (D)        15               6.6                 10.7                29               2.5
Idaho          C.L. “Butch” Otter (R)      58               2.5                     -0.4            58               -0.5
                                                                                                                  Continued next page



                                                                               14
                                                                                              Changes in Revenues
                                                    Proposed Changes Actual Changes            from Proposed and
                                         Spending     in Per Capita   in Per Capita   Revenue Enacted Tax Changes
State                    Governor          Score      Spending (%)    Spending (%)     Score          (%)
Illinois          Pat Quinn (D)             33            4.8              6.2           0            9.2
Indiana           Mitch Daniels (R)         45            3.7              2.9          52            0.2
Iowa              Terry Branstad (R)        57            3.1             -1.3          57            -0.4
Kansas            Sam Brownback (R)         40            2.3              7.7         100            -6.2
Kentucky          Steven Beshear (D)        38            4.3              4.9          53            0.1
Louisiana         Bobby Jindal (R)          81            -1.0            -4.1          54            0.0
Maine             Paul LePage (R)           45            1.1              7.9          91            -3.7
Maryland          Martin O’Malley (D)       40            3.8              5.1          39            1.4
Massachusetts     Deval Patrick (D)         54            1.2              3.5          49            0.4
Michigan          Rick Snyder (R)           60            0.4              2.6          60            -0.6
Minnesota         Mark Dayton (D)           13           10.2              8.9           0            5.5
Missouri          Jay Nixon (D)             52            2.3              2.4          57            -0.4
Montana           Brian Schweitzer (D)      47            3.7              1.9          56            -0.2
Nebraska          Dave Heineman (R)         57            1.4              1.8          63            -0.9
Nevada            Brian Sandoval (R)        96            -4.6            -5.8          22            3.1
New Hampshire     John Lynch (D)            79            0.5             -5.9          56            -0.3
New Jersey        Chris Christie (R)        48            3.6              1.8          75            -2.1
New Mexico        Susana Martinez (R)       48            2.1              4.7          62            -0.9
New York          Andrew Cuomo (D)          51            2.7              2.4          47            0.6
North Carolina    Beverly Perdue (D)        58            1.1              2.1          42            1.1
North Dakota      Jack Dalrymple (R)        38            -1.0            27.1          68            -1.4
Ohio              John Kasich (R)           61            0.7              1.5          58            -0.5
Oklahoma          Mary Fallin (R)           51            2.0              3.3          59            -0.5
Oregon            John Kitzhaber (D)        43            3.8              3.8          42            1.2
Pennsylvania      Tom Corbett (R)           83            -1.8            -3.7          60            -0.6
Rhode Island      Lincoln Chafee (I)        29            5.1              7.5          44            0.9
South Carolina    Nikki Haley (R)           39            2.6              7.7          75            -2.2
South Dakota      Dennis Daugaard (R)       55            0.6              4.5          54            0.0
Tennessee         Bill Haslam (R)           24            3.1            13.1           55            -0.1
Texas             Rick Perry (R)            47            2.7              3.8          54            0.0
Utah              Gary Herbert (R)          47            3.0              3.1          49            0.4
Vermont           Peter Shumlin (D)         28            6.0              6.1          46            0.8
Virginia          Bob McDonnell (R)         46            2.6              4.4          52            0.1
Washington        Chris Gregoire (D)        46            4.7              0.7          23            3.1
West Virginia     Ray Tomblin (D)           28            2.5            12.5           61            -0.8
Wisconsin         Scott Walker (R)          53            2.0              2.8          66            -1.2
Wyoming           Matt Mead (R)             70            -0.3            -0.6          54            0.0

Average of 48 states                                      2.2              3.6                        0.4



                                           15
Table A.2
Tax Rate Variables

                                                     Change in Top   Change in Top     Change in          Change in
                                         Tax Rate      Individual      Corporate      General Sales   Cigarette Tax Rate
State                 Governor            Score     Income Tax Rate Income Tax Rate     Tax Rate       (cents per pack)
Alabama         Robert Bentley (R)         51           0.00             0.00             0.00                  0
Arizona         Jan Brewer (R)             51           0.00             -2.07            1.00                  0
Arkansas        Mike Beebe (D)             51           0.00             0.00             0.00                  0
California      Jerry Brown (D)            51           0.00             0.00             0.00                  0
Colorado        John Hickenlooper (D)      51           0.00             0.00             0.00                  0
Connecticut     Dan Malloy (D)             18           0.20             0.75             0.35                 40
Delaware        Jack Markell (D)           51           0.00             0.00             0.00                  0
Florida         Rick Scott (R)             51           0.00             0.00             0.00                  0
Georgia         Nathan Deal (R)            51           0.00             0.00             0.00                  0
Hawaii          Neil Abercrombie (D)       51           0.00             0.00             0.00                  0
Idaho           C.L. “Butch” Otter (R)     60          -0.40             -0.20            0.00                  0
Illinois        Pat Quinn (D)              16           2.00             2.20             0.00               100
Indiana         Mitch Daniels (R)          67           0.00             -2.00            0.00                  0
Iowa            Terry Branstad (R)         51           0.00             0.00             0.00                  0
Kansas          Sam Brownback (R)          66          -1.55             0.00             0.00                  0
Kentucky        Steven Beshear (D)         51           0.00             0.00             0.00                  0
Louisiana       Bobby Jindal (R)           51           0.00             0.00             0.00                  0
Maine           Paul LePage (R)            59          -0.55             0.00             0.00                  0
Maryland        Martin O’Malley (D)        48           0.25             0.00             0.00                  0
Massachusetts   Deval Patrick (D)          61           0.00             -0.75            0.00                  0
Michigan        Rick Snyder (R)            53          -0.10             0.00             0.00                  0
Minnesota       Mark Dayton (D)            51           0.00             0.00             0.00                  0
Missouri        Jay Nixon (D)              51           0.00             0.00             0.00                  0
Montana         Brian Schweitzer (D)       51           0.00             0.00             0.00                  0
Nebraska        Dave Heineman (R)          51           0.00             0.00             0.00                  0
Nevada          Brian Sandoval (R)         51           0.00             0.00             0.00                  0
New Hampshire John Lynch (D)               51           0.00             0.00             0.00                  0
New Jersey      Chris Christie (R)         51           0.00             0.00             0.00                  0
New Mexico      Susana Martinez (R)        51           0.00             0.00             0.00                  0
New York        Andrew Cuomo (D)           37           1.97             0.00             0.00                  0
North Carolina Beverly Perdue (D)          51           0.00             0.00             0.00                  0
North Dakota    Jack Dalrymple (R)         80          -0.87             -1.25            0.00                  0
Ohio            John Kasich (R)            56          -0.32             0.00             0.00                  0
Oklahoma        Mary Fallin (R)            55          -0.25             0.00             0.00                  0
                                                                                                       Continued next page


                                                                         16
                                                                 Change in Top   Change in Top              Change in             Change in
                                               Tax Rate            Individual      Corporate               General Sales      Cigarette Tax Rate
State                      Governor             Score           Income Tax Rate Income Tax Rate              Tax Rate          (cents per pack)
Oregon             John Kitzhaber (D)              51                0.00                  0.00                  0.00                     0
Pennsylvania       Tom Corbett (R)                 51                0.00                  0.00                  0.00                     0
Rhode Island       Lincoln Chafee (I)              51                0.00                  0.00                  0.00                     4
South Carolina Nikki Haley (R)                     51                0.00                  0.00                  0.00                     0
South Dakota       Dennis Daugaard (R)             51                0.00                  0.00                  0.00                     0
Tennessee          Bill Haslam (R)                 51                0.00                  0.00                  0.00                     0
Texas              Rick Perry (R)                  51                0.00                  0.00                  0.00                     0
Utah               Gary Herbert (R)                44                0.00                  0.00                  0.00                  101
Vermont            Peter Shumlin (D)               47                0.00                  0.00                  0.00                    38
Virginia           Bob McDonnell (R)               51                0.00                  0.00                  0.00                     0
Washington         Chris Gregoire (D)              44                0.00                  0.00                  0.00                  100
West Virginia      Ray Tomblin (D)                 61                0.00                  -0.75                 0.00                     0
Wisconsin          Scott Walker (R)                51                0.00                  0.00                  0.00                     0
Wyoming            Matt Mead (R)                   51                0.00                  0.00                  0.00                     0

Average of 48 states                                                 0.01                  -0.08                 0.03                     8
Note: These are the tax rate changes approved by the governors. It excludes the expiration of temporary increases. The changes are the actual changes
in the rates. For example, Illinois’ top individual income rate increased from 3.00 to 5.00 percent, and thus the table shows 2.00.

within the category. One exception is that the               states grant governors differing amounts
cigarette tax rate variable is half-weighted be-             of authority over budget processes. For ex-
cause that tax is a smaller source of state reve-            ample, most governors are empowered with
nue than income and sales taxes. The average                 a line item veto to trim spending, but some
of the scores for the three categories produces              governors do not have that power. Another
the overall grade for each governor.                         example is that the supermajority voting re-
                                                             quirement to override a veto varies among
Measurement Caveats                                          the states. Such factors give governors dif-
    This report uses publicly available statis-              ferent levels of budget control that are not
tical data to measure the fiscal performance                 accounted for in this study.
of the governors. There are, however, several                    Nonetheless, the results presented here
unavoidable problems in such grading.                        should be a reasonable reflection of each gov-
    For one thing, the report card cannot                    ernor’s fiscal approach. Governors receiving
entirely isolate the policy effects of the gov-              an “A” have focused on reducing tax burdens
ernors from the fiscal decisions of state leg-               and cutting spending. Governors receiving
islatures. Governors and legislatures both                   an “F” have put the government’s desire for
influence tax and spending outcomes, and if                  program expansion ahead of the public’s
a legislature is controlled by a different party,            need to keep its hard-earned money. In the
a governor’s control over fiscal policy may be               middle are many governors who gyrate be-
diminished. To help isolate the performance                  tween fiscal approaches one year to the next.
of governors, variables 1 and 3 measure the                  Hopefully, the leadership shown by the “A”
effects of each governor’s proposed, but not                 governors will inspire other governors to pur-
necessarily enacted, recommendations.                        sue the bold fiscal reforms that the states will
    Another factor to consider is that the                   need in coming years.



                                                        17
 Brewer supports                                     Appendix B:
      business tax                      Fiscal Policy Notes on the Governors
  cuts to improve        Following are highlights of the fiscal records of the 48 governors covered in this report.
         Arizona’s    The discussions are based on the tax and spending data used for grading the governors,
                      as well as other information that sheds light on their fiscal policy approach. Note that the
 competitiveness.     grades are calculated on the basis of each governor’s record since 2010, or since 2011 if that
       In 2011 she    was the first year in office for the governor.
 signed into law a
corporate tax rate    Alabama
  cut from 6.97 to    Robert Bentley, Republican                                         Legislature: Republican
       4.9 percent.   Grade: B                                                           Took Office: January 2011

                         Former doctor Robert Bentley scored much better on spending than on taxes. As gov-
                      ernor, he has opposed tax increases, but he hasn’t pushed for major tax reforms. Instead,
                      he has supported narrow tax breaks for particular companies and industries. In 2011, for
                      example, he signed into law a tax credit for companies that hired new workers, but only if
                      companies had fewer than 50 employees and workers were paid more than $10 per hour. In
                      2012 he provided Airbus with a slew of incentives to build a new assembly plant in Mobile.
                         On spending, however, Bentley has been frugal. His most recent budget proposed a 9 per-
                      cent cut in general fund spending, and he signed into law reforms to reduce the unfunded
                      costs of state pension plans. Furthermore, state government employment is down 9 percent
                      since Bentley entered office.55


                      Arizona
                      Jan Brewer, Republican                                             Legislature: Republican
                      Grade: D                                                           Took Office: January 2009

                          Governor Brewer has gained a national profile with her conservative border enforcement
                      policies. Her fiscal policies have been less conservative. Her budgets have usually proposed
                      substantial increases in spending, and her tax policies have included a mix of tax increases
                      and cuts. In 2010 she helped push through a “temporary” increase in the state sales tax rate
                      from 5.6 to 6.6 percent to raise $1 billion a year. The tax is set to expire in 2013, but an inter-
                      est group has succeeded in putting a permanent extension on the ballot for this November.
                      To her credit, Brewer wants the tax hike to expire as promised, but she should have known
                      that “temporary” tax increases often become permanent.
                          The good news is that Brewer supports business tax cuts to improve Arizona’s competi-
                      tiveness. In 2011 she signed into law a corporate tax rate cut from 6.97 to 4.9 percent, which
                      is phased in over four years. In 2012 she approved further business tax cuts, which mainly
                      included pro-growth reforms such as a capital gains tax cut.


                      Arkansas
                      Mike Beebe, Democrat                                               Legislature: Democratic
                      Grade: C                                                           Took Office: January 2007

                         Governor Beebe has approved reductions in sales taxes on groceries, but he has also sup-



                                                                      18
ported some tax increases. In 2008 he approved a large increase in severance taxes on natural
gas companies, and in 2009 he hit cigarette consumers with a tax increase of 56 cents per
pack. More recently, the governor has supported small and narrow tax cuts, and he has
increased sales taxes on online purchases. The governor’s budgets have proposed spending
increases a bit higher than the average governor.


California
Jerry Brown, Democrat                                              Legislature: Democratic
Grade: D                                                           Took Office: January 2011

   Jerry Brown was sworn in for his third term as governor in 2011, after previously serving
between 1975 and 1983. Brown has been confronted with a sluggish California economy
and chronic budget deficits. He has pursued spending restraint and large tax increases to
reduce deficits. He cut general fund spending from about $92 billion in fiscal 2011 to about
$87 billion in fiscal 2012. But his most recent budget reversed that progress and proposed
spending of about $93 billion in fiscal 2013.
   In 2012 Brown approved $2.7 billion in bonds for the first segment of the state’s high-
                                                                                                      Brown is pushing
speed rail project. The project threatens to create a huge and ongoing drain to the state bud-        for approval
get. The officially estimated cost of the California high-speed rail project has soared from          of a November
$43 billion to almost $100 billion.
   Brown and many California legislators seem to think that the state’s fiscal problems               ballot measure
can be solved by raising taxes to fill budget gaps. But the real problem is a combination of          to increase the
chronic overspending and high state tax rates that suppress economic activity. California’s
top personal income tax rate of 10.3 percent is the nation’s second highest; the corporate tax
                                                                                                      sales tax rate
rate of 8.8 percent is the ninth highest; and the state-level sales tax rate of 7.25 percent is the   to 7.5 percent
nation’s highest. The Tax Foundation finds that California has the third worst tax climate            and increase the
for businesses in the country.56
   Despite this high-tax reality, Brown wants to increase taxes further. He is pushing for ap-        top individual
proval of a November ballot measure to increase the sales tax rate to 7.5 percent and increase        income tax rate
the top individual income tax rate to 13.3 percent.57 These hikes would raise a huge $6 bil-          to 13.3 percent.
lion a year in an effort to help the government balance its books. But such a tax increase
would cause further damage to the state economy, which in turn wouldn’t help average
families or aid state tax collections over the long run.
   Brown has supported other tax increases, including a broadening of the corporate tax base
and an increase in vehicle-related taxes. But California voters have recently shown their dis-
pleasure with high taxes when they rejected a cigarette tax increase on the ballot in June 2012.


Colorado
John Hickenlooper, Democrat                                        Legislature: Divided
Grade: C                                                           Took Office: January 2011

    Former entrepreneur, brewpub owner, and Denver mayor John Hickenlooper is steering
a fiscally centrist path as governor. His spending record has been about average among the
governors. However, he has opposed major tax increases, and he says that he supports a flat-
ter tax system with fewer loopholes. He wants to improve the tax climate for business invest-
ment, and he cut the state’s business personal property tax. A news story explained this re-
form: “Business leaders have long complained that the personal property tax, which assesses



                                                19
                    a perpetual fee on every piece of equipment used by a business, is one of the most onerous in
                    the state, as it requires payment even in years in which the business does not make a profit
                    and discourages companies from expanding or purchasing new equipment.”58 Another in-
                    dicator of Hickenlooper’s fiscal stance was that he did not actively support a November
                    2011 ballot question to increase income and sales taxes. That was wise because Colorado
                    voters overwhelming rejected it with 64 percent voting no.59


                    Connecticut
                    Dan Malloy, Democrat                                              Legislature: Democratic
                    Grade: F                                                          Took Office: January 2011

                        Governor Dan Malloy signed into law one of the largest tax increases of any state in
                    recent years.60 His 2011 bill increased revenue by $1.8 billion annually, equal to about 15
                    percent of the state’s total tax collections. The top personal income tax rate was increased
                    from 6.5 to 6.7 percent, and the top corporate tax rate was increased from 8.25 to 9.0 per-
                    cent. The retail sales tax rate was increased from 6.0 to 6.35 percent, and the sales tax base
                    was broadened. There were also increases in cigarette taxes, hotel taxes, alcohol taxes, luxury
                    goods taxes, online sales taxes, and the state death tax.
                        Malloy is a good example of a governor who creates a more hostile climate for businesses
                    in general, but then tries to compensate for the damage with tax incentives. After enacting
                    his large tax increase, Malloy signed into law a “jobs bill” with narrow tax breaks for hiring.
                    In his February 2012 budget update, he claimed that these breaks were a “far reaching” and
                    “rigorous initiative to grow jobs . . . and the result is a state that is finally ready to compete
                    in the global marketplace.”61 The truth is that Connecticut would be more ready to compete
                    in the global marketplace if the governor hadn’t put in place one of the highest corporate
                    tax rates in the nation.


                    Delaware
                    Jack Markell, Democrat                                            Legislature: Democratic
                    Grade: D                                                          Took Office: January 2009

                       When he first came into office, Governor Markell walloped Delaware residents with a
                    whole range of tax increases. In 2009 he signed into law increases in the top personal in-
                    come tax rate, the corporate franchise tax, the gross receipts tax, and cigarette taxes. In 2011
                    Markell seemed to partly realize the error of his ways and signed legislation to cut taxes so
                    that the state could “stay competitive” and “create jobs.”62 The bill slightly reduced his pre-
                    vious income tax increase, trimmed the state’s gross receipts tax, and provided a few other
                    modest tax breaks. However, Markell’s score on this report card was dragged down by his
  Governor Dan      substantial spending increases in recent years.
  Malloy signed
 into law one of
                    Florida
  the largest tax   Rick Scott, Republican                                            Legislature: Republican
increases of any    Grade: A                                                          Took Office: January 2011
  state in recent     Former health care entrepreneur Rick Scott has pursued reforms on both the spending
           years.   and tax sides of the Florida budget. Governor Scott has made some progress, but the legisla-



                                                                   20
ture has blocked some of his major initiatives. The legislature hasn’t cut spending as much      Scott
as Scott has proposed, but the overall state budget will be down slightly in fiscal 2013 com-    understands tax
pared to fiscal 2011. Scott has vetoed hundreds of millions of dollars of unneeded spending,
put in place pension reforms for state workers, and cut state government employment by           competition,
about 4 percent.63 He also wisely rejected federal subsidies for a high-speed rail system. The   and he wants
governor’s package of proposed reforms (the “7-7-7” plan) includes spending cuts, budget
transparency, regulatory reforms, education reforms, and tax reduction.64
                                                                                                 Florida’s
    Scott understands tax competition, and he wants Florida’s business climate to be the best    business climate
in the country. He proposes to phase out the state corporate income tax, which he says “will     to be the best in
allow companies to receive the greatest return on their investment, expand their businesses
and create jobs. The eventual elimination of the corporate income tax will remove a major        the country.
barrier to attracting Florida job creators such as future Fortune 100, Fortune 500, and other
growing companies.”65
    Scott has proposed an initial cut in the corporate tax rate from 5.5 to 3.0 percent, fol-
lowed by a complete repeal of the tax by 2018. So far the legislature hasn’t passed the rate
cut, but it has passed more modest reforms. It agreed to two expansions in the corporate
tax exemption, which has removed more than 12,000 small businesses from the tax. Scott
plans to keep chipping away at the corporate tax with the ultimate goal of repealing it for
all Florida businesses.
    In addition, the legislature has approved Scott’s plan to increase the exemption amount
for taxes on business tangible personal property from $25,000 to $50,000, which would end
the tax for about 156,000 businesses.66 This tax cut will be on the November ballot for voters
to make the final decision. Scott is also tackling another anti-investment tax burden with
his reductions to sales taxes on business purchases of machinery and equipment. Finally,
Scott signed a property tax cut for water management districts.


Georgia
Nathan Deal, Republican                                         Legislature: Republican
Grade: C                                                        Took Office: January 2011

   Governor Nathan Deal was on the wrong side of a major fiscal policy issue in Georgia
this year. By a large margin, state voters shot down a one percentage point increase in re-
gional sales taxes to fund transportation on a July 2012 ballot. The governor supported the
tax hike, but he was out of step with the mood of the citizens, who were distrustful about
giving the government more money.67 Nonetheless, Deal has approved some tax cuts. In
2011 he approved a temporary freeze in the gasoline tax rate, and in 2012 he signed a pack-
age that included reduced income taxes for married couples, a phase-out of the property tax
on vehicles, and an end to the sales tax on energy used in manufacturing. The package also
raised sales taxes on Internet purchases. On spending, Governor Deal’s two budgets have
proposed increases slightly higher than the average increases in other states.


Hawaii
Neil Abercrombie, Democrat                                      Legislature: Democratic
Grade: F                                                        Took Office: December 2010

   Neil Abercrombie has been governor of Hawaii for less than two years, yet he has already
revealed his strong preference for higher taxes and spending. State general fund spending



                                              21
                      jumped almost 12 percent in his first year in office.68 To fund the higher spending, the
                      governor has supported a slew of tax increases. He signed into law higher taxes on rental
                      cars, limitations on income tax deductions, and an expansion of excise taxes. He has also
                      proposed higher taxes on pension income, soda, and alcohol. No wonder that the governor’s
                      approval ratings have been some of the lowest of any governor.69


                      Idaho
                      C. L. “Butch” Otter, Republican                                  Legislature: Republican
                      Grade: B                                                         Took Office: January 2007

                         In his first couple years as governor, Butch Otter pushed for major increases in vehicle-
                      related taxes, although he also supported some modest tax cuts, such as reductions to sales
                      taxes on groceries. More recently, Otter approved substantial income tax cuts. In 2012 he
                      signed legislation cutting the corporate tax rate from 7.6 to 7.4 percent and the individual
                      income tax rate from 7.8 to 7.4 percent. Idaho’s income tax rates are still too high, but these
                      reductions certainly move in the right direction.
The 2011 Illinois        Unfortunately, Otter has also expanded some narrow tax incentives that clutter the tax
 tax increase was     code. In 2011 legislation, Idaho created a tax credit of up to 6 percent of wages for busi-
by far the largest    nesses that hire new workers. The jobs must include health care benefits, pay $15 per hour,
                      and fulfill other criteria. Such tax credits distort business decisions, and they are costly for
  increase of any     companies and the government to administer.
    state in many        On spending, Otter pursued reductions for fiscal 2010 and fiscal 2011, but he supported
                      substantial increases for fiscal 2012 and fiscal 2013.
             years.

                      Illinois
                      Pat Quinn, Democrat                                              Legislature: Democratic
                      Grade: F                                                         Took Office: January 2009

                          Governor Quinn took office in 2009 after his predecessor, Rod Blagojevich, was impeached
                      and removed from office. Unfortunately, Quinn is following the same big government ap-
                      proach to fiscal policy that his predecessor did. In 2009 Quinn signed a $1.1 billion per year
                      tax increase, which included higher taxes on beer, wine, liquor, candy, beverages, hygiene
                      products, and video gaming. In 2011 he pushed though a massive tax increase of $7.3 billion
                      a year, which included higher individual income taxes, corporate taxes, and estate taxes. The
                      top individual income tax rate rose from 3 to 5 percent, and the top corporate tax rate rose
                      from 4.8 to 7.0 percent. Businesses in Illinois pay an extra 2.5 percentage point charge on top
                      of the basic rate, which brings the overall rate on corporate income to 9.5 percent.
                          The 2011 Illinois tax increase was by far the largest increase of any state in many years.
                      The $7.3 billion of added net revenue represents about one-quarter of the state’s total tax
                      collections. To top that off, Quinn signed a $1 per pack increase on cigarette taxes in 2012,
                      which will hit lower-income residents particularly hard.
                          Quinn has apparently noticed that high taxes are pushing businesses out of Illinois, and
                      so he has dished out special breaks to particular companies that threaten to leave, includ-
                      ing Sears, Motorola, and the companies that operate Chicago’s financial exchanges, CME
                      Group and CBOT Holdings.70 Quinn is also a strong supporter of handing out fiscal good-
                      ies to the film and TV industries, which gives him a chance to do media events with Hol-
                      lywood stars.71



                                                                    22
    Governor Quinn’s spending policies are similarly irresponsible. Spending has increased
at a faster clip than in most states in recent years, and Quinn has a penchant for issuing debt
to paper over the state’s budget problems. He has proposed issuing $7 billion in bonds to
pay for past-due bills that the state has failed to pay.72 And in recent years, Illinois has issued
billions of dollars in bonds to cover its required contributions to the state pension plan.


Indiana
Mitch Daniels, Republican                                          Legislature: Republican
Grade: B                                                           Took Office: January 2005

    Former George W. Bush budget director Mitch Daniels has been praised for his fiscal
management, but he seems to be more interested in balancing the budget than in shrinking
state government. Indiana’s general fund spending has risen a little more slowly than the
average state since 2005 when Daniels took office. However, state government employment
is about the same today as it was in 2005.
    Daniels has a mixed record on taxes. In his first term, he signed an increase in the ciga-
rette tax and he proposed a temporary increase in the top income tax rate. In 2008 he signed
a tax package that swapped an increase in the state sales tax rate for lower local property
taxes. The plan delivered an overall tax cut, but it increased state power at the expense of
healthy tax competition between local jurisdictions.
    In 2011 Daniels signed legislation to reduce the state’s corporate tax rate from 8.5 to 6.5
percent. That was a good reform, but the cut was offset with tax increases to make the over-
all package revenue neutral. In 2012 he signed legislation phasing out the state inheritance
tax over a 10-year period.
    Daniels also approved some tax increases in recent years. In 2011 he signed into law a
large increase in unemployment insurance (UI) taxes on businesses. The increase was cou-
pled with reductions in UI benefits, but the tax increases accounted for most of the package.
Daniels also approved a large increase in health care provider taxes.


Iowa
Terry Branstad, Republican                                         Legislature: Divided
Grade: B                                                           Took Office: January 2011

   Terry Branstad was governor of Iowa for a remarkable 16 years between 1983 and 1999.
He returned to the governorship in 2011. During the 1990s, Cato report cards gave Branstad
fairly poor reviews, particularly for his spending increases.73 Today, Branstad is older and
wiser, and perhaps more frugal.
   The governor is promoting the idea of “reducing the size and cost of government by 15
percent,” which is an admirable goal.74 But state spending has risen a bit, not fallen, since
he has been in office. Nonetheless, he has reduced state government employment by about               In 2011 Daniels
6 percent so far, which is a good start toward shrinking government.75                                signed legislation
   On taxes, Branstad is pursuing reforms to make Iowa more competitive for business invest-
ment. One goal is to reduce property taxes on industrial and commercial properties in the             to reduce the
state. In particular, Branstad wants to cut the assessment levels for this property from 100          state’s corporate
percent to 60 percent of market value. Branstad also recognizes the economic damage caused
by the Iowa’s high 12 percent corporate tax rate, and he wants to cut the rate in half. Despite
                                                                                                      tax rate from 8.5
Branstad’s admirable leadership on these issues, the legislature has not passed his reforms yet.      to 6.5 percent.


                                                23
 The top personal     Kansas
   income tax rate    Sam Brownback, Republican                                           Legislature: Republican
                      Grade: A                                                            Took Office: January 2011
in Kansas was cut
 substantially and       As governor of Kansas, former U.S. senator Sam Brownback has gained a major policy
                      success with income tax reforms. In his 2012 State of the State address, he called for a “fairer,
    the tax bracket   flatter, and simpler” tax system, and he proposed a detailed plan. A few months later, the
     structure was    legislature delivered a tax reform bill to the governor’s desk and he signed it into law.
        simplified.      The top personal income tax rate in Kansas was cut substantially and the tax bracket
                      structure was simplified. The three existing tax rates of 3.5 percent, 6.25 percent, and 6.45
                      percent were replaced by rates of 3.0 percent and 4.9 percent. The standard deduction was
                      increased from $6,000 to $9,000 for married filers and from $4,500 to $9,000 for head-of-
                      household filers. The reform also got rid of numerous special-interest tax breaks. And it ex-
                      empted from tax certain nonwage income of limited liability corporations, S corporations,
                      and sole proprietorships. That change will allow 191,000 Kansas businesses to keep more of
                      their earnings for reinvestment and expansion.
                         The tax cuts are expected to save Kansas households more than $800 million a year. Rela-
                      tive to total state tax collections, these are the largest tax cuts of any state in recent years. The
                      reforms have made the Kansas tax code simpler and more supportive of economic growth.76
                         Governor Brownback doesn’t score as well on spending, particularly because of the sub-
                      stantial increase in the Kansas budget in fiscal 2012. Nonetheless, Brownback has signed
                      into law needed pension reforms for state workers, and he has abolished some state agencies
                      including the Kansas Parole Board and the Kansas Arts Commission, although the latter
                      seems to have been recently resurrected.


                      Kentucky
                      Steven Beshear, Democrat                                            Legislature: Divided
                      Grade: D                                                            Took Office: December 2007

                          Early in Governor Beshear’s tenure, he pushed through a doubling of the state cigarette
                      tax and an increase in taxes on wine, beer, and liquor. But in recent years, Beshear has gener-
                      ally avoided tax increases, arguing “taxes, my friend, are not the answer.”77 He has, however,
                      pushed for increased revenues from gaming. In 2012 the governor discussed tax reform in
                      his State of the State speech, and he has assembled a commission to study the issue. Bes-
                      hear’s spending record is the main cause of his low grade on this year’s report card. He has
                      proposed substantial spending increases in recent years.


                      Louisiana
                      Bobby Jindal, Republican                                            Legislature: Republican
                      Grade: B                                                            Took Office: January 2008

                         Bobby Jindal is a popular and accomplished governor with a fiscally conservative record.
                      Jindal repealed income tax increases that were put in place in 2002, and he has supported
                      modest business tax cuts while vetoing tax increases. However, Jindal has succumbed to “tax
                      incentive disease.” He has supported tax breaks for film production, music recording, and
                      other activities. In 2011 he even made the state’s digital media tax incentives “refundable,”
                      which means that the government will hand out cash to favored digital media businesses.



                                                                       24
    Jindal’s score is boosted by his frugal spending record. General fund spending is expect-
ed to be lower in fiscal 2013 than it was in fiscal 2010. And state government employment
is down about 10 percent since Jindal came into office in 2008.78 In 2012 Jindal signed into
law major reforms to pensions, which will move new state workers to a 401(k)-style plan.


Maine
Paul LePage, Republican                                         Legislature: Republican
Grade: A                                                        Took Office: January 2011

   Paul LePage was one of 18 children growing up in an impoverished home in Maine to
French-speaking parents. He had a rough childhood, but he pulled himself up and had a
successful career in business. As governor, LePage has a “rough and tumble” style, but he
has some solid achievements.79 Most importantly, he signed into law a major income tax
cut in 2011.80 The reform reduced the top personal income tax rate from 8.5 to 7.95 percent,
simplified the tax brackets, and eliminated taxes for 70,000 low-income households. The
package also included some business tax cuts.
   In 2012 the governor signed legislation to reduce the top personal income tax rate to 4
                                                                                                  LePage says that
percent over time if there are sufficient budget surpluses.81 LePage says that his ultimate       his ultimate
goal is to phase out the Maine personal income tax completely.82 Another step toward that         goal is to phase
goal is LePage’s proposal to eliminate taxes on pension income to discourage retirees from
leaving Maine for warmer and tax-friendlier states. LePage is also aiming to chop the cor-        out the Maine
porate tax rate from 8 to 4 percent.83                                                            personal income
   LePage’s record on spending is a little more mixed. General fund spending increased
about 8 percent in fiscal 2012, although it is expected to drop a bit in fiscal 2013. The gov-
                                                                                                  tax completely.
ernor has signed cost-cutting reforms to welfare and health care programs, and he wants           LePage is also
to eliminate funding for Maine Public Broadcasting, which he calls “corporate welfare.”84         aiming to chop
LePage has also signed reforms to reduce pension obligations for state workers, and he has
modestly trimmed state government employment.                                                     the corporate tax
                                                                                                  rate from
                                                                                                  8 to 4 percent.
Maryland
Martin O’Malley, Democrat                                       Legislature: Democratic
Grade: D                                                        Took Office: January 2007

    Martin O’Malley has been in politics his entire career, and he has long supported an ex-
pansionary approach to government. In his first year as governor, O’Malley signed a $1.4 bil-
lion package of tax increases. It included increases in corporate taxes, personal income taxes,
sales taxes, and cigarette taxes. O’Malley has been at it again recently, approving increases
in income taxes, alcohol taxes, hospital taxes, and tobacco taxes during 2011 and 2012. For
singles earning more than $100,000 and couples earning more than $150,000, the top in-
come tax rate was raised to 5.75 percent. Local taxes in Maryland bring the total top income
tax rate to 8.95 percent. O’Malley’s legislation also reduced personal exemptions under the
income tax. Higher taxes are fueling higher spending in Maryland. The general fund budget
jumped more than 13 percent in fiscal 2012.




                                              25
                   Massachusetts
                   Deval Patrick, Democrat                                          Legislature: Democratic
                   Grade: B                                                         Took Office: January 2007

                       Governor Patrick has supported numerous tax increases during his time in office. In
                   2008 he approved a cigarette tax increase and a corporate tax overhaul. The latter included
                   a tax rate cut and a broadening of the tax base, which resulted in a net overall increase in tax
                   revenues. In 2009, Patrick raised taxes by $1 billion a year, mainly from increasing the sales
                   tax rate from 5.0 to 6.25 percent. In 2012 Patrick proposed more tax increases, including
                   increases on cigarettes, soda, and candy.
                       However, Patrick’s score in this report was substantially boosted by his corporate tax rate
                   cut, which was phased in over time. The corporate tax rate fell from 8.75 percent in 2010
                   to 8.0 percent in 2012. Also, Patrick’s spending record during the period of this report was
                   slightly better than the record of the average governor. And to his credit, he signed into law
                   a pension reform package last year that raised retirement ages, ended some pension abuses,
                   and cut costs for taxpayers.


                   Michigan
                   Rick Snyder, Republican                                          Legislature: Republican
                   Grade: B                                                         Took Office: January 2011

                      Former businessman Rick Snyder’s most important fiscal achievement as governor so
                   far has been repealing the Michigan Business Tax (MBT). That unique tax imposed a heavy
                   burden on both corporate and noncorporate businesses, and it was a serious impediment to
                   investment in the state. Governor Snyder signed legislation replacing the MBT with a less-
                   costly corporate income tax. The effect of the bill was to remove a layer of taxes from 95,000
                   businesses and provide an overall business tax cut of $1.6 billion a year.
                      This tax cut was partly offset by increases in individual income taxes, including higher
                   taxes on pension income and reduced tax credits. However, Snyder signed legislation in
                   2012 to accelerate a planned reduction in the top individual income tax rate from 4.35 to
                   4.25 percent and to increase personal exemption amounts.
                      Snyder is currently pushing to reduce business personal property taxes, which raise
                   about $1 billion a year in Michigan. The Anderson Economic Group found that these taxes
        Former     are particularly harmful to the capital-intensive industrial sector in Michigan.85 In addition
                   to the direct costs, Anderson found that the complexity of these taxes imposes large com-
  businessman      pliance burdens on businesses. Snyder is proposing to remove from business tax personal
  Rick Snyder’s    property valued under $40,000, which would exempt about 60 percent of businesses cur-
most important     rently paying the tax.86 To offset this tax reduction, the governor is proposing to phase out
                   numerous special interest tax breaks.
          fiscal
   achievement
                   Minnesota
 as governor so    Mark Dayton, Democrat                                            Legislature: Republican
   far has been    Grade: F                                                         Took Office: January 2011
  repealing the
                      It didn’t take long after he entered office for Governor Dayton to reveal his preferences
      Michigan     for higher taxes and spending. General fund spending jumped almost 10 percent his first
  Business Tax.    year in office.87 To fund the spending increase, Dayton proposed a tax increase of more



                                                                 26
than $2 billion annually, including raising the top personal income tax rate from 7.85 to        After trying
10.95 percent and adding a 3 percentage point charge on top of that for the highest earners.     to clobber the
Dayton also wanted a new statewide property tax on higher-valued homes, higher taxes on
corporations, and other tax increases. The legislature rejected his tax increases, but Dayton    Minnesota
returned the favor by vetoing various tax cuts passed by the legislature.                        economy with
   After trying to clobber the Minnesota economy with higher taxes in 2011, Dayton appar-
ently wanted to show that he was helping the economy and has supported narrow giveaways
                                                                                                 higher taxes in
to businesses. For example, he proposed a temporary tax credit of $1,500 to businesses for       2011, Dayton
each new person hired, and he signed legislation to subsidize a new stadium for the Min-         apparently
nesota Vikings.
                                                                                                 wanted to show
                                                                                                 that he was
Missouri                                                                                         helping the
Jay Nixon, Democrat                                             Legislature: Republican
Grade: C                                                        Took Office: January 2009        economy and
                                                                                                 has supported
   Governor Nixon has followed a centrist approach to fiscal policy. Budget growth under
Nixon has been about average among the states, and he has cut state government employ-
                                                                                                 narrow giveaways
ment since 2010. He has also signed legislation requiring state workers to contribute to their   to businesses.
pension plans, which will reduce taxpayer costs over time.
   Nixon has generally avoided tax increases and focused on business tax cuts in recent
years. One achievement was signing 2011 legislation to phase out the state’s business fran-
chise tax over five years. Nixon said that “phasing out this burdensome tax will encourage
businesses to expand their operations and create jobs in Missouri.”88
   However, tax incentive disease runs rampant in Missouri, as it does in many states.89 Mis-
souri’s tax code is littered with more than 60 tax credits. In 2012 Nixon approved a small
business tax deduction of $10,000 for each job created, but only if the job pays more than a
specified wage. The deduction rises to $20,000 if the job comes with health insurance.


Montana
Brian Schweitzer, Democrat                                      Legislature: Republican
Grade: C                                                        Took Office: January 2005

   Former agronomist and rancher Brian Schweitzer has a generally centrist fiscal record as
governor. Montana general fund spending grew rapidly during Schweitzer’s first few years
in office, but spending has been fairly flat in recent years. In 2011 Schweitzer approved a
modest reduction in property taxes on business equipment. The bill reduced the rate from
3 to 2 percent on the first $2 million of equipment owned. This is a good reform, but Sch-
weitzer has blocked larger tax reforms proposed by the legislature, including full repeal of
corporate income taxes and property taxes on business equipment.90


Nebraska
Dave Heineman, Republican                                       Legislature: Nonpartisan
Grade: B                                                        Took Office: January 2005

  Governor Heineman is a fiscal conservative, and his record on tax cutting stands out. In
2006 he approved substantial personal income tax cuts. In 2007 he signed further income



                                              27
                      tax cuts and a repeal of the estate tax. Nebraska still has an inheritance tax, and Heineman
                      wants to repeal that as well. In 2012 he proposed trimming the top personal and corporate
                      income tax rates. He didn’t get the rate cuts, but he did convince the legislature to pass mod-
                      est individual income tax reductions. The legislature hasn’t passed Heineman’s corporate
                      tax cuts or inheritance tax repeal yet, but the governor says that he will keep on trying. His
                      recent record on spending is pretty good compared to other governors. In his first four years
                      in office, general fund spending expanded substantially, but since 2009 spending has been
                      fairly flat.


                      Nevada
                      Brian Sandoval, Republican                                          Legislature: Democratic
                      Grade: B                                                            Took Office: January 2011

                         Brian Sandoval is a former judge and Nevada attorney general. As governor, he has had
                      to be tight with the purse strings because of Nevada’s poor economy. Sandoval proposed a
                      9 percent cut to the budget for fiscal 2012, and the legislature ending up approving a cut
     Sandoval said    of about 5 percent. State government employment has fallen 4 percent under Sandoval.91
that he would not        Sandoval’s fiscal shortcomings are on the tax side of the budget. He came into office
extend temporary      promising no tax increases, and he specifically said that he would not extend temporary
                      tax increases that had been enacted in 2009.92 But he reversed course and signed into law a
 tax increases that   two-year extension of the increases, which included higher sales taxes, higher business taxes,
 had been enacted     and business license fees. He recently said that he wanted to extend the “temporary” tax
                      increases through 2015.
    in 2009. But he
   reversed course
   and signed into    New Hampshire
                      John Lynch, Democrat                                                Legislature: Republican
     law a two-year   Grade: B                                                            Took Office: January 2005
  extension of the
                          John Lynch has been a popular governor, and he has the highest score on this report card of
         increases.   any Democrat. New Hampshire residents are blessed with having neither a sales tax nor a per-
                      sonal income tax, and Governor Lynch supports that tax structure. In an address last year he
                      said, “Our businesses have grown and thrived in part because of our tax advantage . . . to con-
                      tinue to grow, we must move forward keeping our taxes low—with no sales or income tax.”93
                      Nonetheless, Lynch has supported occasional tax increases. In 2009 he approved an increase
                      in cigarette taxes, hotel taxes, restaurant meal taxes, and vehicle license fees. However, he hasn’t
                      pursued tax increases in recent years, and he has supported some small tax cuts.
                          Lynch oversaw a substantial increase in spending his first few years in office, but spend-
                      ing has been cut in recent years. For the latest biennium budget, the New Hampshire legisla-
                      ture made large spending cuts, which had the effect of boosting Lynch’s score on this report
                      card. State spending in the current biennium is expected to be down about 10 percent from
                      the last biennium.
                          While Lynch is generally a centrist on tax and spending policies, he has opposed govern-
                      ment-cutting reforms that are outside the scope of this report. For example, he has blocked
                      recent efforts by the legislature to reform state pensions and repeal the state minimum
                      wage.




                                                                      28
New Jersey
Chris Christie, Republican                                       Legislature: Democratic
Grade: B                                                         Took Office: January 2010

    Chris Christie is a charismatic governor whose battles with unions and efforts to reform
government pensions have gained him national attention. Christie scores well on taxes in
this report. He has repeatedly vetoed increases to individual income tax rates. Last year, for
example, the legislature passed an increase in the top income tax rate from 8.97 to 10.75
percent. In vetoing the hike, Christie noted: “Increasing taxes on businesses and highly
productive taxpayers who we need here in New Jersey to create jobs and grow our economy
will only serve to drive those individuals out of New Jersey in search of states with lower
tax burdens.”94
    Christie turned the tables on the legislature this year and pushed for a 10 percent across-
the-board income tax cut. Then he proposed a property tax cut. Those cuts have not passed
yet, but they are changing the dynamic of the debate in New Jersey from nonstop threats of
tax increases to a discussion of tax reductions.
    In 2011 Christie approved a package of generally sensible business tax cuts that are being
phased in over four years. The cuts included changes to the net operating loss rules, changes
to corporate tax apportionment rules, a repeal of an energy tax, and other reforms.
    However, Christie has a weakness for narrow breaks that clutter the tax code. In 2011, for
example, he expanded a “business retention” break that offers firms up to $2,250 in tax cred-
its for each job retained. In 2012 he approved a “Grow New Jersey” tax credit of $5,000 or
more to companies for each job created or retained, provided that companies jump through
various government hoops.95
    Governor Christie scores lower on spending. The general fund budget was flat in Chris-
tie’s first year, but then increased at a robust pace in fiscal 2012 and fiscal 2013. The gover-
nor has made some good spending decisions, such as canceling a $9 billion project to build
a rail tunnel under the Hudson River. Christie was rightly concerned that the project might
have a large cost overrun. Christie has also trimmed state government employment slightly.
However, some of Christie’s spending decisions have been panned, such as his investment of
$200 million of public money into the American Dream Meadowlands mall.


New Mexico
Susana Martinez, Republican                                      Legislature: Democratic
Grade: C                                                         Took Office: January 2011

    Former district attorney Susana Martinez has been governor since 2011. Her spending
score in this report is a little below average, and was likely dragged down by New Mexico’s
liberal legislature. For example, her proposed spending increases have been lower than the
final enacted increases.                                                                           Christie scores
    However, Martinez scores well on tax policy. She promised to oppose tax increases, and         well on taxes in
she has stuck to that pledge. In 2011, for example, she vetoed a tax increase to fund unem-
ployment compensation saying, “I support reducing unemployment benefits to protect the             this report. He
solvency of the fund, but I do not support increasing job-killing taxes on small businesses        has repeatedly
while we are struggling to recover from a recession.”96 She also vetoed a bill to expand the
corporate tax base.
                                                                                                   vetoed increases
    She has pursued business tax cuts to make New Mexico more competitive. She signed a            to individual
bill to reduce the “pyramiding” or layering of gross receipts taxes on inputs to construction      income tax rates.

                                               29
   In his January    and manufacturing. And she has called for exempting about 40,000 small businesses from
 2011 State of the   the state’s gross receipts tax. Another good move by the governor was approving a reduction
                     in film tax credits, which are wasteful corporate welfare.
    State address,
Governor Cuomo
                     New York
    said that New    Andrew Cuomo, Democrat                                          Legislature: Divided
       York must     Grade: D                                                        Took Office: January 2011
    “hold the line
                        In his January 2011 State of the State address, Governor Cuomo said that New York must
     on taxes now    “hold the line on taxes now and reduce taxes in the future.”97 Unfortunately, the governor
 and reduce taxes    has not lived up to that pledge. In December 2011, Cuomo signed an increase in the top
   in the future.”   personal income tax rate, which is expected to raise $1.9 billion annually. A previous “tem-
                     porary” hike in the top rate from 6.85 percent to rates of 7.85 percent and 8.97 percent was
  Unfortunately,     supposed to expire at the end of 2011. But Cuomo’s legislation will “temporarily” create a
the governor has     new top rate of 8.82 percent through the end of 2014. Cuomo’s tax plan included some tax
                     breaks, but the overall net tax increase was more than $1.5 billion a year. These tax hikes
   not lived up to   won’t help the New York economy, which already suffers from having the second worst busi-
      that pledge.   ness tax climate in the nation.98
                        There were no new taxes in the governor’s budget this year, and his spending increases
                     have been about average among the governors. Also to his credit, Cuomo approved pension
                     reforms for public sector workers, which could save state and local governments in New
                     York tens of billions of dollars over coming years.99 In New York City alone, the annual cost
                     of pensions for city workers has exploded from $1.3 billion to $8 billion in just the past de-
                     cade.100 So Cuomo’s reforms were desperately needed, but much more needs to be done to
                     reduce government spending in New York.


                     North Carolina
                     Beverly Perdue, Democrat                                        Legislature: Republican
                     Grade: C                                                        Took Office: January 2009

                        Early in her tenure, Governor Perdue signed a giant package of tax increases that raised
                     $1 billion annually. Middle-income households were hit with a 2 percent surtax on their
                     incomes, and higher earners and corporations were hit with a 3 percent surtax. In addition,
                     the state sales tax rate was raised by one percentage point, bringing the typical state-local
                     rate in North Carolina to 7.75 percent. Perdue also broadened the sales tax base, increased
                     cigarette taxes, imposed a new hospital tax, and hiked taxes on beer, wine, and liquor.
                        Perdue promised that the sales tax increase would be temporary, but in 2011 she changed
                     her mind and proposed extending most of it. However, since the hike was put in place the
                     legislature has flipped to Republican control and it has blocked extension of the sales tax
                     increase.
                        Purdue seems undecided on the issue of business taxes. She opposed a major tax cut for
                     small businesses last year, which passed over her veto. However, she proposed cutting the
                     corporate income tax rate from 6.9 to 4.9 percent, but that pro-growth reform has not yet
                     passed.




                                                                  30
North Dakota
Jack Dalrymple, Republican                                        Legislature: Republican
Grade: B                                                          Took Office: December 2010

    North Dakota is enjoying an economic boom as the energy sector grows rapidly. The
strong economy is creating a government revenue boom, which is allowing legislators to
both increase spending and cut tax rates. The biennium general fund budget is expected
to jump from $3.3 billion in 2010–2011 to $4.2 billion in 2012–2013, which is a huge 27
percent increase. The result is that Governor Dalrymple receives a low score on spending in
this report card.
    However, the governor greatly boosted his grade by signing into law large tax cuts in
2011. The cuts reduced individual income rates by about 18 percent and corporate tax rates
by about 20 percent. The top individual rate falls from 4.86 to 3.99 percent and the top cor-
porate rate falls from 6.4 to 5.15 percent. The governor also approved local property tax re-
lief. Dalrymple has recently suggested that he will propose additional property and income
tax cuts in his next budget.
                                                                                                     Governor Kasich
Ohio                                                                                                 has held state
John Kasich, Republican                                           Legislature: Republican            spending down
Grade: B                                                          Took Office: January 2011
                                                                                                     the last two
   John Kasich took the helm of Ohio government after a career in the U.S. Congress as a             years, and he has
committed budget reformer. Governor Kasich has held state spending down the last two
years, and he has pursued a variety of tax reforms. In 2011 he signed a repeal of the Ohio
                                                                                                     pursued a variety
estate tax, which had been one of the most onerous estate taxes in the nation. He also ap-           of tax reforms.
proved an investment tax credit, and he supported the final segment of a phase-in of a prior         In 2011 he signed
income tax cut. However, the governor’s score was dragged down a bit by his approval of a
hospital tax increase in 2011.                                                                       a repeal of the
   Kasich understands the importance of tax cuts to spur economic growth. He argues: “Too            Ohio estate tax,
many successful entrepreneurs are fleeing the state to escape high taxation. When they leave,
we lose the money. That’s one thing; we also lose the jobs, and their entrepreneurial spirit.”101
                                                                                                     which had been
To that end, Kasich is exploring major income tax reforms. One idea he suggested is to raise         one of the most
severance taxes on Ohio’s growing energy industry and using the revenues to reduce income            onerous estate
tax rates. The legislature hasn’t gone along with that idea yet. Kasich is also looking at repeal-
ing loopholes or “special deals” in the tax code in return for reducing tax rates.                   taxes in the
   The Tax Foundation’s annual study on state taxation finds that Ohio is the 12th worst             nation.
state in terms of tax competitiveness.102 A key problem, says the Foundation’s Joe Hench-
man, is Ohio’s unique Commercial Activities Tax, which is imposed on business gross re-
ceipts. Henchman argues “this pernicious tax hits the receipts of profitable and unprofitable
companies alike, and pyramids through the chain of production, distorting price signals.
Essentially all public finance experts revile such taxes, and they hit business activity hard.”103
Clearly, Ohio is far from a tax-friendly place for entrepreneurs right now, so Governor Kasich
has his work cut out for him.




                                                31
                       Oklahoma
                       Mary Fallin, Republican                                           Legislature: Republican
                       Grade: B                                                          Took Office: January 2011

                          Mary Fallin ran for office on a “no income tax” platform, and she has pursued that goal
                       as governor. She supported a scheduled cut in the top income tax rate from 5.5 to 5.25 per-
                       cent. And she is championing a plan to gradually phase out income taxes in Oklahoma. The
                       plan would initially replace the seven current tax brackets with just three brackets, and it
                       would cut the top income tax rate from 5.25 to 3.5 percent. The base would be dramatically
                       simplified and many tax credits and other special breaks would be eliminated.
                          Governor Fallin almost reached a deal along these lines with the Republican legislature
                       this year, but the plan stalled before final passage. One hurdle to reform is that special inter-
                       est groups have lined up to defend their current tax breaks. Hopefully the legislation will
                       move ahead next year because it appears to be an excellent reform.
                          Fallin has pursued other fiscal reforms, including approving pension changes for state
                       workers. However, the governor’s score was dragged down a bit on this report because she
                       approved a new hospital tax in 2011.104


                       Oregon
                       John Kitzhaber, Democrat                                          Legislature: Divided
                       Grade: D                                                          Took Office: January 2011

                          John Kitzhaber started his third term as governor in 2011, having previously served as gov-
                       ernor between 1995 and 2003. His prior scores on Cato report cards were dismal. He earned
                       an “F” three times for his support of rapid spending growth and large tax increases.105
                          Governor Kitzhaber still supports substantial spending increases. Oregon’s general fund
                       budget is expected to grow about 9 percent in the current biennium. The good news is that
                       Kitzhaber hasn’t imposed any broad-based tax increases in his current term, although he did ap-
                       prove a substantial increase in Oregon’s hospital tax. And Kitzhaber wants to change the state’s
                       “kicker” mechanism, which refunds excess revenues to taxpayers. The governor wants to retain
                       more of any excess revenues in a rainy day fund rather than rebating funds back to the citizens.

   Mary Fallin ran
     for office on a   Pennsylvania
                       Tom Corbett, Republican                                           Legislature: Republican
  “no income tax”      Grade: A                                                          Took Office: January 2011
platform, and she
 has pursued that         Former state attorney general Tom Corbett has followed a fiscally conservative path as
                       governor. His two budgets have been fairly frugal with general fund spending in fiscal 2013
 goal as governor.     expected to be lower than in fiscal 2011. State government employment is down a bit under
         And she is    Corbett, and he wants to privatize Pennsylvania’s government-run wine and liquor stores.
                       He says, “I don’t believe we belong in the business of selling alcohol. It’s that simple.”106
    championing a         Corbett has also focused on business tax reform. He signed a repeal of the state’s in-
 plan to gradually     heritance tax on farmers, and he signed a reform in corporate tax apportionment rules.
          phase out    But Corbett’s main fiscal achievement is to push ahead with ending Pennsylvania’s Capital
                       Stock and Franchise Tax, which is paid by about 100,000 businesses.107 Phasing out the tax
   income taxes in     had been planned for years, but delayed by previous governors worried about losing revenue.
        Oklahoma.      Corbett has sliced the tax from $819 million in 2011 to an expected $479 million in 2013,



                                                                      32
and he plans to fully repeal it by 2014. Corbett argues: “This tax is a job-killer . . . We don’t   Governor Haley
need it. We don’t benefit from it, and we must get rid of it.”108                                   has proposed
    An accountant described the state’s business tax problem: “Pennsylvania has a corporate
income tax rate of 9.99 percent. Only Iowa, with a graduated rate that can reach 12 percent,        major corporate
has a higher rate. Coupled with Pennsylvania’s Capital Stock tax, which is levied on assets,        tax reforms. She
not income, the state hits companies twice, while many other states do not.”109 Since the
Capital Stock and Franchise Tax is based on asset values, it hits companies every year wheth-
                                                                                                    wants to initially
er they are profitable or not.                                                                      cut the corporate
    An economic advisory panel formed by Governor Corbett recently recommended cutting the          tax rate from 5.0
corporate tax rate, so hopefully that will be the next item on the governor’s reform agenda.110
                                                                                                    to 3.75 percent,
                                                                                                    and then fully
Rhode Island                                                                                        phase out the tax
Lincoln Chafee, Independent                                       Legislature: Democratic
Grade: D                                                          Took Office: January 2011         over four years.
    Lincoln Chafee is a former Republican U.S. senator who served one term and lost his
reelection bid in 2006. He is now a political independent, but he leans left on fiscal poli-
cy. As governor, Chafee has presided over a substantial increase in spending. General fund
spending in fiscal 2013 is expected to be up more than 11 percent from fiscal 2011. The rise
in spending has generated a demand for higher taxes. Governor Chafee has signed bills to
modestly broaden the sales tax base and raise the cigarette tax. To Chafee’s credit, however,
he signed into law major reforms to the state pension plan.111


South Carolina
Nikki Haley, Republican                                           Legislature: Republican
Grade: B                                                          Took Office: January 2011

   Nikki Haley is a former accountant and businesswoman. As governor, she has vetoed doz-
ens of spending items in budget bills, approved reforms to state pensions, and moderately
trimmed state government employment. But despite some reforms, the state’s general fund
budget is expected to be more than 11 percent higher in fiscal 2013 than it was in fiscal 2011.
   Governor Haley scores much better on taxes. She has proposed major corporate tax re-
forms. She wants to initially cut the corporate tax rate from 5.0 to 3.75 percent, and then
fully phase out the tax over four years. She also wants to simplify the individual income
tax. Her plan would reduce the number of tax brackets from six to three and provide a sub-
stantial overall tax reduction. The proposed reform, however, wouldn’t drop the state’s top
income tax rate of 7 percent.
   So far, the Republican legislature has blocked these individual and corporate tax reforms.
However, Haley did sign into law a tax rate cut for small business income from 5 to 3 per-
cent. This reform will benefit about 60,000 businesses in the state.


South Dakota
Dennis Daugaard, Republican                                       Legislature: Republican
Grade: C                                                          Took Office: January 2011

   South Dakota has a relatively low tax burden, and Governor Daugaard wants to keep



                                               33
                      it that way. The state does not have a personal or corporate income tax, and it has a sales
                      tax rate of just 4 percent. The Tax Foundation found that the state has the second best tax
                      climate for businesses in the nation.112 Daugaard has spearheaded an advertising campaign
                      targeting investors in high-tax California and Illinois to open or expand their businesses in
                      South Dakota.113
                          Daugaard’s modest grade of “C” reflects the lack of any major steps by the governor to
                      cut taxes and spending. But it is also true that there are fewer tax and spending targets to cut
                      in relatively small-government South Dakota.


                      Tennessee
                      Bill Haslam, Republican                                          Legislature: Republican
                      Grade: D                                                         Took Office: January 2011

                         Bill Haslam is a former businessman and mayor of Knoxville. As governor, his best fiscal
                      move so far is to repeal Tennessee’s inheritance tax. Haslam says that the tax is prompting
                      “a whole lot of people” to leave the state because “it’s cheaper to die in Florida.”114 Haslam
Haslam approved       originally called for an increase in the exemption amount, but he ultimately agreed to a full
an increase in the    phase-out of the inheritance tax over three years. Haslam also signed a small cut in the sales
   state’s hospital   tax on groceries. Balancing out those tax cuts, Haslam approved an increase in the state’s
                      hospital tax from 3.5 to 4.5 percent of hospital net income. Haslam has also been leading
          tax from    the charge to increase taxes on Internet sales.115 State general fund spending rose about 14
3.5 to 4.5 percent    percent during Haslam’s first year in office, which was a key factor in the governor’s low
                      grade.
        of hospital
       net income.
  Haslam has also     Texas
                      Rick Perry, Republican                                           Legislature: Republican
      been leading    Grade: C                                                         Took Office: December 2000
     the charge to
 increase taxes on        Governor Perry has a conservative reputation, but he hasn’t cut state taxes substantially
                      or reduced the size of Texas government. Indeed, Perry has presided over steady increases in
    Internet sales.   spending. Between the 2000–2001 biennium when Perry assumed office and the 2012–2013
                      biennium, state general fund spending rose at an annual average rate of 3.2 percent, and
                      total state spending rose at an annual average rate of 4.6 percent.116
                          His record on taxes is mixed. In 2003 he signed into law a package of tax and fee increases.
                      In 2006 he approved a business tax overhaul that replaced the corporate franchise tax with a
                      modified gross receipts tax called the “Texas Margin Tax.” The new tax hit 180,000 addition-
                      al businesses and increased state-level taxes by more than $1 billion annually.117 The added
                      state revenues were used to reduce local property taxes, but the overall effect of the package
                      has been to centralize government power in the state and reduce beneficial tax competition
                      between local jurisdictions.
                          Nonetheless, Perry has supported increases in small business exemptions for the Margin
                      Tax. And in 2011 he vetoed a bill to tax online purchases. In 2012 he proposed a five-point
                      Texas Budget Compact, which includes transparency in budgeting, a constitutional limit on
                      spending growth, opposition to new taxes, a strong rainy day fund, and the cutting unneces-
                      sary government programs.118




                                                                    34
Utah
Gary Herbert, Republican                                         Legislature: Republican
Grade: D                                                         Took Office: August 2009

    Utah is a generally inviting state from a tax perspective, particularly since a 2006 reform
that replaced a personal income tax that had multiple rates of up to 7 percent with a 5 per-
cent flat tax. Governor Herbert hasn’t undone his state’s positive tax climate, but his record
is not particularly good. On the one hand, he cut the state’s unemployment insurance tax
rate. But on the other hand, he approved a tax increase on hospitals and allowed to pass a
$1.01 per pack tax increase on cigarette consumers. The governor has overseen steady in-
creases in spending in recent years, and state government employment is up 6 percent since
the beginning of 2010.119


Vermont
Peter Shumlin                                                    Legislature: Democratic
Grade: D                                                         Took Office: January 2011

   Governor Shumlin has taken a generally expansionist approach to fiscal policy. In 2011
he signed a 38 cent per pack tax increase on cigarette consumers after initially opposing it.
He also approved a tax increase on health care providers. In 2012 he approved increases in
automobile license and registration fees. His spending increases have been quite large. The
general fund budget is expected to increase 12 percent between fiscal 2011 and fiscal 2013.


Virginia
Bob McDonnell, Republican                                        Legislature: Divided
Grade: C                                                         Took Office: January 2010

    Governor McDonnell has a conservative reputation, but he hasn’t taken any major ac-
tions to shrink the Virginia government. McDonnell has signed into law a smattering of
small tax increases and tax cuts, but he hasn’t proposed any major tax reforms. McDon-             The Virginia
nell hasn’t been very conservative on spending either. The Virginia general fund budget in-
creased from $14.8 billion in the governor’s first year of fiscal 2010 to an estimated $17.2       general fund
billion in fiscal 2013, which is a 16 percent expansion. To his credit, McDonnell pushed to        budget
privatize the government’s liquor stores, but he couldn’t get his own party in the legislature
to go along with the plan.
                                                                                                   increased from
                                                                                                   $14.8 billion in
                                                                                                   the governor’s
Washington
Chris Gregoire, Democrat                                         Legislature: Democratic           first year of
Grade: F                                                         Took Office: January 2005         fiscal 2010 to
   Governor Gregoire earned a well-deserved “F” on the last Cato report card. Under Gre-
                                                                                                   an estimated
goire there has been a never-ending stream of proposals to raise taxes. In her first year, she     $17.2 billion in
approved tax increases on cigarettes, gasoline, liquor, and vehicles. She also re-established      fiscal 2013, which
an estate tax after a previous version had been struck down by the state supreme court.
In 2009 she signed a large tax package that included increases in business and occupation          is a 16 percent
taxes, sales taxes, cigarette taxes, beer taxes, soda taxes, and candy taxes. In 2010 she signed   expansion.


                                               35
          Governor     a package including a dollar-per-pack increase in cigarette taxes, a new hospital tax, higher
    Walker signed      beer taxes, and an increase in business and occupation taxes. In 2011 she proposed a half
                       cent increase in the state sales tax rate. In 2012 she proposed a new $1.50 per-barrel tax on
   a law requiring     crude oil to raise $275 million annually.
       a two-thirds        Gregoire’s big government approach has also played out in Washington’s referendum
                       process. In 2009 Gregoire opposed a ballot measure (I-1033) that would have put a legal cap
 supermajority in      on government revenue growth. In 2010 she supported a ballot measure (I-1098) to create a
  both legislative     state income tax. But Washington voters have turned down an income tax numerous times
chambers to raise      in the past, and they did so again in 2010 by a large margin. Finally, Washington voters have
                       approved legislative supermajority requirements for tax increases a number of times, but
    income, sales,     these past limits have either been put aside by the legislature or by the courts. Gregoire has
  or franchise tax     repeatedly opposed these limits. Voters will try again this November with a ballot measure
              rates.   (I-1185) to create a legislative supermajority requirement for tax increases.


                       West Virginia
                       Earl Ray Tomblin, Democrat                                      Legislature: Democratic
                       Grade: C                                                        Took Office: November 2010

                          Governor Tomblin’s predecessor, Joe Manchin, earned an “A” on Cato’s report card as a
                       result of his pro-growth tax cuts and moderate spending. Tomblin has a more mixed record.
                       He approved a tax increase on hospitals, but he also approved a phase-out of sales taxes on
                       food. Also, Tomblin supports the scheduled reduction in the corporate tax rate originally
                       enacted under Manchin. However, spending has risen under Tomblin. The general fund
                       budget is expected to increase more than 10 percent between fiscal 2011 and fiscal 2013.


                       Wisconsin
                       Scott Walker, Republican                                        Legislature: Divided
                       Grade: B                                                        Took Office: January 2011

                          Scott Walker has been a high-profile governor as a result of his efforts to overhaul pen-
                       sions and union rules for government workers. Act 10, passed in 2011, imposed restrictions
                       on collective bargaining (monopoly unionism) and required increases in worker contribu-
                       tions to health and pension plans. These changes were designed to save money at both the
                       state and local levels of government. In addition, Governor Walker signed a law requiring
                       a two-thirds supermajority in both legislative chambers to raise income, sales, or franchise
                       tax rates. These are all impressive reforms that have improved the long-term fiscal outlook
                       for Wisconsin.
                          Walker’s short-term tax and spending policies are not quite as impressive. His spending
                       increases over two years have been about average among the governors. On taxes, he has
                       signed into law a number of sensible pro-growth cuts, such as reductions in capital gains
                       taxes. But he has also approved narrow incentives that will clutter the tax code, such as
                       breaks for hiring and business relocation. Walker created the Wisconsin Economic Develop-
                       ment Corporation to distribute government grants, tax credits, and other types of corporate
                       welfare.
                          However, major tax reforms are needed, not narrow giveaways to favored companies. Tax
                       Foundation rates Wisconsin as having the eighth worse tax climate for businesses in the
                       nation.120 Thus the state should be pursuing big changes such as repealing its high (7.9



                                                                    36
percent) corporate income tax. Governor Walker has shown himself to be an outstanding                            Wyoming
reformer with his pension and labor union changes, but he should focus his energies on                           has neither
fundamental tax reforms rather than WEDC-style giveaways.
                                                                                                                 a corporate
                                                                                                                 income tax nor
Wyoming
Matt Mead, Republican                                                        Legislature: Republican
                                                                                                                 an individual
Grade: B                                                                     Took Office: January 2011           income tax.
                                                                                                                 This happy state
   The Tax Foundation rates Wyoming as having the best tax climate for businesses in the
nation.121 Wyoming has neither a corporate income tax nor an individual income tax. This                         of affairs may
happy state of affairs may explain why Mead hasn’t made any major changes to the state’s                         explain why
tax system since taking office.                                                                                  Mead hasn’t
   Mead is a frugal budgeter. Wyoming’s current biennium budget spends no more that the
last one. And Mead has prepared plans to cut spending if revenues aren’t as high as planned,                     made any major
rather than tapping the rainy day fund. Mead also signed into law modest reforms to cut the                      changes to the
costs of government pensions.
                                                                                                                 state’s tax system.


                     Notes                                Bureau of the Census, State Government Finance
                                                          data at www.census.gov/govs/state. And see Chris
1. For governors elected in 2010, the data cover          Edwards, “State Corporate Income Taxes Should
the period January 2011 to August 2012.                   Be Repealed,” Cato Institute Tax and Budget Bul-
                                                          letin no. 19, April 2004.
2. Office of Governor Tom Corbett, “Governor
Signs Budget that Controls Spending without In-           11. Robert Cline et al., “Sales Taxation of Busi-
creasing Taxes,” press release, June 30, 2012.            ness Inputs,” State Tax Notes, February 14, 2005.

3. Prior Cato report cards are available at www.          12. Amy Hamilton, “Georgia Governor Proposes
cato.org/state-local-fiscal-policy.                       Business Tax Breaks,” State Tax Notes, January 16,
                                                          2012.
4. State of Connecticut, “Governor’s Midterm
Budget Adjustments, FY2013,” February 8, 2012,            13. Lincoln Institute of Land Policy and Min-
p. 1.                                                     nesota Taxpayers Association, “50-State Property
                                                          Tax Comparison Study,” April 2011.
5. This is the change in general fund spending
between fiscal 2011 and fiscal 2012.                      14. Author’s e-mail exchanges with Aaron
                                                          Twait, Minnesota Taxpayers Association, and
6.   Ibid.                                                Scott Drenkard, Tax Foundation. Tax Founda-
                                                          tion has a detailed study forthcoming on this
7. Data are available at www.oecd.org/ctp/                issue.
taxdatabase. And see Chris Edwards and Daniel
Mitchell, Global Tax Revolution: The Rise of Tax Com-     15. Ed Sealover, “Hickenlooper Signs Business
petition and the Battle to Defend It (Washington: Cato    Property Tax Measure,” Denver Business Journal,
Institute, 2008).                                         March 26, 2012.

8. See Figure 2 in Robert S. Chirinko, “State             16. Ibid.
Tax Incentives: What Are the Facts,” Federal Re-
serve Bank of San Francisco, November 2006.               17. Anderson Economic Group, “Personal Prop-
                                                          erty Tax Reform in Michigan,” April 24, 2012, p. 10.
9. Karen Setze, “South Carolina Governor Pro-
poses Income Tax Cuts,” State Tax Notes, January          18. Ibid., p. 1.
23, 2012.
                                                          19. Council on State Taxation and Ernst and
10. In 2010 corporate income taxes raised $37             Young, “Total State and Local Business Taxes,”
billion out of total state taxes of $702 billion. See     July 2012.



                                                         37
20. Howard J. Wall, “Tax Credits as a Tool of             Hampshire Business Review, August 12, 2011.
State Economic Development Policy,” Show-Me
Institute, October 2011, p. 4.                            36. Bill Graves, “Oregon Legislators Look to Hos-
                                                          pitals for Tax Increase,” The Oregonian, May 19,
21. State of Wisconsin, Department of Revenue,            2011.
“Summary of Tax Exemption Devices,” Febru-
ary 2011, www.revenue.wi.gov/ra/11sumrpt.pdf.             37. Diane Lund-Muzikant, “Hospital Associa-
This is a count of all the “devices” under the in-        tion Raises Objections to New Provider Tax,” The
dividual and corporate income taxes. Note that            Lund Report, June 3, 2011.
some of these breaks would be supported by
most tax experts as a step toward tax efficiency,         38. See National Conference of State Legisla-
so only a portion of the 170 devices are economi-         tures, “State Tax Actions 2011,” February 2012.
cally unjustified.
                                                          39. For a full discussion about problems with
22. Rick Haglund, “Do State Tax Incentives Cre-           federal grant programs, see Chris Edwards, “Fed-
ate Real Jobs, or Just Ribbon-Cutting Ceremo-             eral Aid to the States,” Cato Institute Policy Anal-
nies?” www.mlive.com, July 18, 2010.                      ysis no. 593, May 22, 2007.

23. Will Luther, “Movie Production Incentives:            40. For background, see www.downsizinggov
Blockbuster Support for Lackluster Policy,” Tax           ernment.org/hhs/medicaid-reforms.
Foundation, January 2010.
                                                          41. National Association of State Budget Offi-
24. Joseph Henchman, “States Slashing Film                cers, “The Fiscal Survey of States,” Spring 2012.
Subsidies,” Tax Foundation, November 24, 2010.            These are fiscal years.

25. The instructions for this credit are 10 pages         42. National Association of State Budget Offi-
long. See www.azcommerce.com/assets/QJTC-                 cers, “State Expenditure Report 2010,” December
Guidelines.pdf.                                           2011. These are fiscal years.

26. For a survey of academic studies, see Wall.           43. U.S. Bureau of Economic Analysis, National
                                                          Income and Product Accounts, Table 3.3, www.
27. Billy Hamilton, “Anatomy of a Muddle,”                bea.gov/iTable/index_nipa.cfm. These are calen-
State Tax Notes, August 20, 2012.                         dar years.

28. Ibid.                                                 44. Federal Reserve Board, “Flow of Funds Ac-
                                                          counts of the United States,” June 7, 2012, Table
29. Amy Hamilton, “Illinois Governor Signs In-            D.3.
centive Bill to Keep Sears, CME in State,” State
Tax Notes, January 2, 2012. And see David Mercer,         45. Moody’s Investors Service, “2012 State Debt
“Jobs Cuts to Cost Motorola Tax Credits,” CB-             Medians Report,” May 21, 2012.
SNews.com, August 14, 2012.
                                                          46. Office of Governor Pat Quinn, “Economic
30. For example, see John Buhl, “Governor Ap-             and Fiscal Policy Report,” January 3, 2012.
proves Five-Year Extension of Film Tax Credit,”
State Tax Notes, May 23, 2011.                            47. For more on state bonds, see Chris Edwards,
                                                          “State and Local Government Debt Is Soaring,”
31. Office of Governor Dan Malloy, “Governor’s            Cato Institute Tax and Budget Bulletin no. 37,
Midterm Budget Adjustments, FY2013,” Febru-               July 2006.
ary 8, 2012, p. 1.
                                                          48. Robert Novy-Marx and Joshua D. Rauh,
32. National Conference of State Legislatures,            “The Liabilities and Risks of State-Sponsored
“Health Care Provider and Industry Taxes/Fees,”           Pension Plans,” Journal of Economic Perspectives 23,
April 2012.                                               no. 4 (2009): 191–210.

33. Ibid.                                                 49. Ibid., pp. 191–210.

34. Richard Locker, “Gov. Haslam Unveils Ten-             50. Jagadeesh Gokhale, “State and Local Pen-
nessee Budget,” Commercial Appeal, March 14,              sion Plans: Funding Status, Asset Management,
2011.                                                     and a Look Ahead,” Cato Institute White Paper
                                                          no. 34, February 21, 2012.
35. Michael McCord, “State’s Hospitals Battle
Over State’s Medicaid Funding Experiment,” New            51. Chris Edwards and Jagadeesh Gokhale, “Un-



                                                     38
funded State and Local Health Costs: $1.4 Tril-              of Labor Statistics data available at www.bls.gov/
lion,” Cato Institute Tax and Budget Bulletin no.            sae.
40, October 2006.
                                                             64. Details available at www.letsgettowork.state.
52. For NCSL data on enacted state tax changes,              fl.us.
see National Conference of State Legislatures,
“State Tax Actions 2011,” February 2012, and                 65. See item seven in Scott’s plan at www.letsget
National Conference of State Legislatures, “State            towork.state.fl.us.
Tax Actions 2010,” February 2011. State Tax Notes
is published by Tax Analysts, Falls Church, Vir-             66. Governor Rick Scott, “Policy and Budget Rec-
ginia.                                                       ommendations, Fiscal Year 2012–2013.” Available
                                                             at www.letsgettowork.state.fl.us.
53. See http://taxfoundation.org/tax-basics.
                                                             67. Ariel Hart, “Voters Reject Transportation
54. The National Association of State Budget                 Tax,” Atlanta Journal-Constitution, August 1, 2012.
Officers reports on proposed tax changes, while
the National Conference of State Legislators re-             68. National Association of State Budget Offi-
ports on tax changes that were actually enacted.             cers, “Fiscal Survey of the States,” Spring 2012.
However, these data sources have numerous
shortcomings, so the author assembled a detailed             69. Polls last year by Public Policy Polling found
file of news articles and state budget documents             him to be the least popular governor in the na-
to assess the major tax changes during each gover-           tion. See www.publicpolicypolling.com.
nor’s tenure. Tax changes proposed by governors,
tax changes vetoed, and tax changes signed into              70. Amy Hamilton, “Illinois Governor Signs In-
law were taken into account. The measurement                 centive Bill to Keep Sears, CME in State,” State Tax
of this variable is not perfect, but legislated tax          Notes, January 2, 2012. And see David Mercer, “Jobs
changes represent a key measure of a governor’s              Cuts to Cost Motorola Tax Credits,” CBSNews.com,
fiscal stance, so this variable carries substantial          August 14, 2012.
weight in the study. Legislation that created tem-
porary tax changes were valued at one-half the               71. For example, see John Buhl, “Governor Ap-
value of permanent tax changes. Also note that               proves Five-Year Extension of Film Tax Credit.”
this report excludes changes to unemployment
compensation taxes.                                          72. Office of Governor Pat Quinn.

55. This is average employment May–July 2012                 73. He received a combination of C and D grades
compared to January–March 2011. U.S. Bureau of               during the 1990s.
Labor Statistics data available at www.bls.gov/sae.
                                                             74. See https://governor.iowa.gov/about and see
56. Mark Robyn, “2012 State Business Tax Cli-                https://governor.iowa.gov/goals/15-reduction-in-
mate Index,” Tax Foundation, January 2012.                   the-cost-of-government.

57. This includes the current 1 percentage point             75. This is average employment May–July 2012
millionaire surcharge.                                       compared to January–March 2011. U.S. Bureau
                                                             of Labor Statistics data available at www.bls.gov/
58. Sealover.                                                sae.

59. Jeremy P. Meyer, “Colorado Election Day                  76. Todd Davidson, et al., “Tax Reform Gears
Results Prove a Killing Field for Tax Measures,”             Kansas for Growth,” Kansas Policy Institute, July
Denver Post, November 2, 2011.                               12, 2012.

60. Illinois is the only state with a recent tax in-         77. John Buhl, “Governor Reiterates Opposi-
crease that is larger as a share of total state tax          tion to Tax Increases,” State Tax Notes, February 7,
collections.                                                 2011.

61. State of Connecticut.                                    78. This is average employment May-July 2012
                                                             compared to January–March 2008. U.S. Bureau
62. Simon, “Delaware Governor Approves Busi-                 of Labor Statistics data available at www.bls.gov/
ness, Individual Tax Cuts,” State Tax Notes, July 11,        sae.
2011.
                                                             79. John Richardson, “LePage’s First Year: Con-
63. This is average employment May–July 2012                 tentious, Extreme, and Yes, Effective,” Portland
compared to January–March 2011. U.S. Bureau                  Press Herald, January 8, 2012.



                                                        39
80. Office of Governor Paul LePage, “Governor              98. Robyn.
LePage Signs Budget,” press release, June 20, 2011.
                                                           99. Office of Governor Andrew Cuomo, “Gov-
81. Douglas Rooks, “Legislature Approves Us-               ernor Cuomo Announces Passage of Major Pen-
ing Future Surpluses for Tax Relief,” State Tax            sion Reform,” March 15, 2012.
Notes, May 28, 2012.
                                                           100. New York Times, “Gov. Cuomo’s Pension Pro-
82. Mal Leary, “LePage: Eventual Goal Is to Elim-          posal,” editorial, February 27, 2012.
inate Income Tax,” Kennebec Journal, March 19,
2012.                                                      101. Karen Setze, “Governor Promises Claw-
                                                           backs, No Tax Increases,” State Tax Notes, March
83. Mal Leary, “LePage Outlines Tax Goals at               14, 2011.
New York City Conference,” Maine Sun-Journal,
April 11, 2012.                                            102. Robyn.

84. Susan M. Cover, “LePage: Funding MPBN Is               103. Joseph Henchman and William Ahern, “Ohio
Like Corporate Welfare,” Kennebec Journal, March           Is Not a Low-Tax Paradise,” Tax Foundation, June
16, 2012.                                                  8, 2009.

85. Anderson Economic Group, p. 10.                        104. National Conference of State Legislatures,
                                                           “Health Care Provider and Industry Taxes/Fees,”
86. Ibid.                                                  April 2012.

87. National Association of State Budget Offi-             105. Prior Cato report cards are available at www.
cers, “Fiscal Survey of the States,” Spring 2012.          cato.org/state-local-fiscal-policy.

88. Simon Brown, “Missouri Governor Signs                  106. Evan Forrester, “Governor Tom Corbett Dis-
Franchise Tax Phaseout Bill,” State Tax Notes, May         cusses Possible Liquor Privatization,” www.fox43.
2, 2011.                                                   com, February 22, 2012.

89. Wall., p. 4.                                           107. Pennsylvania Office of the Budget, “2011–
                                                           2012 Budget Highlights,” 2011.
90. Charles S. Johnson, “Schweitzer Pans GOP
Tax Eliminations,” Billings Gazette, March 9, 2012.        108. Office of Governor Tom Corbett.

91. This is average employment for May–July                109. Ford Turner, “The Tax That Will Not Die,”
2012 compared to January–March 2011. U.S. Bu-              Reading Eagle, February 21, 2012.
reau of Labor Statistics data available at www.bls.
gov/sae.                                                   110. John Buhl, “Governor’s Panel Seeks Lower
                                                           Corporate Tax Rate,” State Tax Notes, August 27,
92. David McGrath Swartz, “How Sandoval’s                  2012.
Decision on Taxes Remakes Politics for the Next
Year,” Las Vegas Sun, March 18, 2012.                      111. Arthur Laffer, Stephen Moore, and Jonathan
                                                           Williams, “Rich States, Poor States,” American
93. Lorna Colquhoun, “Governor Pledges to                  Legislative Exchange Council, 2012, p. 8.
Keep Taxes Low,” State Tax Notes, January 17, 2011.
                                                           112. Robyn.
94. Simon Brown, “New Jersey Governor Vetoes
Millionaire Tax,” State Tax Notes, July 4, 2011.           113. Simon Brown, “Governor Touts Business
                                                           Tax Climate in Marketing Campaign,” State Tax
95. Amy Hamilton, “New Jersey Governor Signs               Notes, August 15, 2011.
Job Creation Tax Credit,” State Tax Notes, January
16, 2012.                                                  114. Tom Humphrey, “Governor Calls for Gro-
                                                           cery, Inheritance Tax Reductions,” State Tax Notes,
96. Barry Massey, “New Mexico Governor Rejects             January 16, 2012.
UI Tax Increase,” State Tax Notes, April 18, 2011.
Note that unemployment insurance tax changes               115. Chas Sisk, “Haslam Testifies before Con-
are not included in the scoring of this report.            gress on Behalf of the Internet Tax Bill,” The Ten-
                                                           nessean, July 24, 2012.
97. Simon Brown, “Governor: Hold Line on
Taxes Now, Reduce Them Later,” State Tax Notes,            116. Texas Legislative Budget Board, “Texas Fact
January 10, 2011.                                          Book 2012,” pp. 40, 41.



                                                      40
117. Susan Combs, Texas Comptroller of Public              compared to January–March 2010. U.S. Bureau of
Accounts, “Biennial Revenue Estimate, 2012–                Labor Statistics data available at www.bls.gov/sae.
2013,” January 201, pp. 13–14.
                                                           120. Robyn.
118. See http://governor.state.tx.us/initiatives/tx
budgetcompact.                                             121. Ibid.

119. This is average employment May–July 2012




                                                      41
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